a) Build an Excel worksheet to model the two options and help the firm decide which to choose. You can ignore depreciation or tax effects in your analysis (i.e., evaluate the options simply based on their respective cash flows). b) Assuming that the equipment dealer is exactly indifferent between the construction firm purchasing or leasing, what is the dealer's implied required rate of return?
a) Build an Excel worksheet to model the two options and help the firm decide which to choose. You can ignore depreciation or tax effects in your analysis (i.e., evaluate the options simply based on their respective cash flows). b) Assuming that the equipment dealer is exactly indifferent between the construction firm purchasing or leasing, what is the dealer's implied required rate of return?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 1
A construction firm must obtain a bulldozer to work on a long-term project. There are two options available to the firm - using a loan to purchase the bulldozer for $825,000 and
leasing it from the equipment dealer. If the firm decides to purchase, it can finance the entire cost through a commercial bank for 8 years at an interest rate of 7.5% compounded
annually. At the end of eight years, the firm will sell the bulldozer for a salvage value of $80,000. If the firm decides to lease, it will pay the equipment dealer an up-front fee equal to
5% of the purchase price, followed by eight annual payments of $135,000. At the end of the lease, the firm will return the equipment to the dealer. The firm's discount rate is 10%.
a) Build an Excel worksheet to model the two options and help the firm decide which to choose. You can ignore depreciation or tax effects in your analysis (i.e., evaluate the options
simply based on their respective cash flows).
b) Assuming that the equipment dealer is exactly indifferent between the construction firm purchasing or leasing, what is the dealer's implied required rate of return?
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