Case 27 2 Rock Creek Golf Club

QUESTION 1:

Note: due to rounding $10 was added to value of principal reduction in year 5.

QUESTION 2:

One of the reasons that the implicit rate (4%) is lower than the interest rate RCGC would have to pay to borrow the 89,600 amount could be that the leasing company has a better credit risk rating than RCGC and can borrow at a lower interest rate. Another reason could be that the leasing company will get the carts back at the end of the lease and could lease them to a different company. Another reason could be that the lessor will benefit from the depreciation tax shield on the carts, which might offset the lessor’s differential interest revenue.

QUESTION 3: There are two scenarios to answer this question: first scenario RCGB purchases the carts using its own funds and we calculate the NPV @ 8%/ year, and the second scenario is that RCGB purchases the carts using borrowed money @ 8%, payable in 5 years (amortization schedule shown in Question 1).
First scenario: RCGB uses own funds to purchase the carts. In this case, by comparing the NPV of the Purchase option versus the Lease option (see calculations below), we can see that the NPV (@ 8%) of the Lease option is higher by $9,826 than the NPV of the Purchase option. Even the tax shield from depreciation and the proceeds from the disposal of the carts at the end of 5 years did not help make the Purchase option NPV be higher than the Lease option NPV. The conclusion is that RCGB should lease the carts from B.

Second scenario: RCGC borrows the money @ 8% interest rate. See below schedule please. Purchase option NPV is still lower than the NPV of the Lease option by $3,409. The conclusion is that RCGB should lease the carts from B.

QUESTION 4:

Delta NPV after tax is $4,000
This means that Annual Payment x 3.993 = $4,000 (factor 3.993 used for 5 years, 8%)
Annual Payment after tax = 4,000 / 3.993 = 1,001.75 (for 40 carts)
Annual Payment per cart after tax = 1,001.75 / 40 = 25.04
Annual Payment per cart