Please give a solution with fomula not excel, thank you. Firm F is a transportat
ID: 2789818 • Letter: P
Question
Please give a solution with fomula not excel, thank you.
Firm F is a transportation company. It needs new vans. It has two opportunities: either lease or buv. The lease contract is 10 years. The before-tax lease payment is 1900 per year (claimed at the beginning of the year) for one van. I year a before-tax operating cost per van worth 20% of 1900 (claimed at the end of the year f firm F leases the vans, it will incur every » The cost of one van is 20,000. If firm F buys the vans, it will incur every year a before-tax operating cost per van worth 30% of 1900 (claimed at the end of the year) The salvage value of one van after 10 years is 10,000. The depreciation amount of one van is 1000 over the 1st year and 5000 over the 10th year (claimed at the beginning of the year) ·The risk-free rate is 5%. The corporate tax rate is 25%. 1) Compute the after-tax cash-flow from leasing one van at time 0 1, 9, and 10 (CF·CF. CF. CFO) 2) Compute the after-tax cash-flow from buying one van at time 0, 1, 9, and 10 (CF: CF , CF: CF%) 3) Compute the net present value of leasing one van (NPV') 4) Compute the net present value of buying one van (NPV) 5) Does firm F choose to buy or lease the vans?Explanation / Answer
As Present Value of cash outflows is less in Leasing option it is advised to take van through leasing
Leasing Option Year Before tax lease payment Operating cost Total outflow Less: Tax @ 25% Net Outflow PV factor @ 5% PV of cash Outflow 0 1900 0 1900 475(1900* 25%) 1425
(1900 - 475) 1.0000 1425
(1425 * 1) 1 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.9524 1628.57
(1710 * 0.9524) 2 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.9070 1551.02
(1710 * 0.9070) 3 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.8638 1477.16
(1710 * 0.8638) 4 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.8227 1406.82
(1710 * 0.8227) 5 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.7835 1339.83
(1710 * 0.7835) 6 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.7462 1276.03
(1710 * 0.7462) 7 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.7107 1215.26
(1710 * 0.7107) 8 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.6768 1157.40
(1710 * 0.6768) 9 1900 380
(20% * 1900) 2280
(1900+380) 570
(2280 *25%) 1710
(2280 - 570) 0.6446 1102.28
(1710 * 0.6446) 10 0 380
(20% * 1900) 380 95
(380 *25%) 285
(380 - 95) 0.6139 174.97
(285 * 0.6139) Net Present Value of Cash outflows 13754.34