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?
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 11P: REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old...
Related questions
Question
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?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 7 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781305635937
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Financial Accounting: The Impact on Decision Make…
Accounting
ISBN:
9781305654174
Author:
Gary A. Porter, Curtis L. Norton
Publisher:
Cengage Learning
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781305635937
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Financial Accounting: The Impact on Decision Make…
Accounting
ISBN:
9781305654174
Author:
Gary A. Porter, Curtis L. Norton
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781285867977
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning