Please answer this question ASAP *P20-27 Ramey Corporation is a diversified publ
ID: 2403290 • Letter: P
Question
Please answer this question ASAP*P20-27 Ramey Corporation is a diversified public company with nationwide interests in commercial real estate development, banking, copper mining, and metal fabrication. The company has offices and operating locations in majo cities throughout Canada. With corporate headquarters located in a metropolitan area of a western province, company executives must travel extensively to stay connected with the various phases of operations. In order to make busines travel more efficient to areas that are not adequately served by commercial airlines, corporate management is currenty evaluating the feasibility of acquiring a business aircraft that can be used by Ramey executives. Proposals for either leas ing or purchasing a suitable aircraft have been analyzed, and the leasing proposal was considered more desirable. The proposed lease agreement involves a twin-engine turboprop Viking that has a fair value of S1.5 million. This plane would be leased for a period of 10 years, beginning January 1, 2017. The lease agreement is cancellable only upon accidental destruction of the plane. An annual lease payment of $170,794 is due on January l of each year, with the fhirst ment to be made on January 1, 2017. Maintenance operations are strictly scheduled by the lessor, and Ramey wil maintenance costs are pay for these services directly to suppliers as they are performed. Estimated annual repair and
Explanation / Answer
Answer to Part (a)
Recalculation of Present value @ 10% (Amount in $)
Recalculation of Present value @ 6% (Amount in $)
Therefore, present value calculated by Vice President of Ramey Corporation is correct
Answer to Part (b1)
Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return beacause of changing economic conditions. Benefits may be the expectation of profiotable operation over the asset's economic life and of gain from appreciation in value or relaisation of residial value.
General indicators of transfer of risks and rewards
1) Lessor transfers ownership of the asset to the lessee at the end of lease term
2) Lease term is for the major part of economic life of the asset
3) At the inception of the lease, PV of minimum lease payments amounts to atleast substanbtially all of the fair value of the asset
Year Lease rentals Purchase value Total outflow Present value factor Amount 0 170794 170794 1 170794 1 170794 170794 0.909 155267 2 170794 170794 0.826 141152 3 170794 170794 0.751 128320 4 170794 170794 0.683 116655 5 170794 170794 0.621 106050 6 170794 170794 0.564 96409 7 170794 170794 0.513 87644 8 170794 170794 0.467 79677 9 170794 170794 0.424 72433 10 300000 300000 0.386 115663 TOTAL 1270064