Rock Creek Golf Club is a public golf class owned by a private company and managed by Lee Jeffries. The instance entails a argument about the golf carts used to take participants around the class alternatively of walking about. The carts they already owned were old and there was a demand for new golf carts.
Approached by two salesman. Lee Jeffries was forced to take to do a trade with one of them. Salesman A offered carts at $ 2. 240 each and at the terminal of five old ages the expected salvage value was traveling to be $ 240 each.
Salesman B proposed to rent the golf carts for $ 500 dollars per cart per twelvemonth. This was collectible at the terminal of the twelvemonth for five old ages and the contract could be cancelled at any clip with 90 yearss notice. This trade was easier to acquire out of.
Either manner $ 420 dollars in costs per cart per twelvemonth were expected and gross of $ 84000 per twelvemonth was expected.
Executive Summary
This instance concerns whether to purchase golf carts or rent golf carts. The fiscal deductions are different based on the manner the golf class acquires ( bargains or rentals ) usage of the carts and on the footings used in geting them.
The inquiries posed in this instance convey to illume the replies that would state an proprietor of a golf class presented with the footings for sale and the footings for rental of golf carts that he was presented with. what he should make.
We calculated what the involvement payments would be each twelvemonth if we paid for the golf carts each twelvemonth for five old ages. and besides the chief payment for each twelvemonth. We besides figured out what the involvement rate would be for the rental of the carts with the footings that would show. With this information available to us. along with the present values for each of the footings and options the proprietor of the golf class should be able to do an intelligent determination since the gross and disbursals for each option. that he expects to bring forth or incur. are the same throughout the class of the twelvemonth.
Issue
1. Assume that in order to buy the carts. RCGC would hold to borrow $ 89600 at 8 per centum involvement for five old ages. repayable in five equal twelvemonth terminal installments. Fix an amortisation agenda for this loan. demoing how much of each year’s payment is for involvement and how much is applied to pay principal.
2. Assume systemic lupus erythematosuss individual B’s company besides would be willing to sell the carts outright at $ 2. 240 per cart. Given the proposed rental footings. and presuming the rental is outstanding for five old ages. what involvement rate is inexplicit in the rental? ( Ignore revenue enhancement impacts to the leasing company when ciphering this inexplicit rate. ) Why is this inexplicit rate different from the 8 % that RCGC may hold to pay to borrow the financess needed to buy the carts.
3. Should RCGC purchase the carts from A. or rent them from B? ( Assume that if the carts are purchased. RCGC will utilize accelerated depreciation for income revenue enhancement intents. based on an estimated life of 5 old ages and an estimated residuary value of $ 240 per cart. The accelerated depreciation per centums for old ages 1-5. severally are 35 % . 26 % . 15. 6 % . 11. 7 % . and 11. 7 % )
4. Assume randomly that buying the carts has an NPV that is $ 4000 higher than the NPV of renting them. How much would B hold to cut down the proposed one-year rental payment to do leasing every bit attractive as buying the cart?
Analysis
1. The involvement payment at 8 % for each twelvemonth would be $ 7. 168 dollars per twelvemonth. We arrived at this by multiplying 8 % * 89. 600.
The chief payment for each twelvemonth would be $ 17. 920 dollars per twelvemonth.
2. The rental footings implicit for the proprietor of the golf class would be 12 % given the proposed state of affairs in this inquiry.
We arrived at this decision by taking $ 2500- $ 2240
$ 2240 giving us 12 % .
3. Attached
4. If the NPV for buying the carts wasa $ 4000 dollars higher than renting the carts the one-year rental payments would hold to be such that they make the PV expression equal $ 4000. We would make this by stop uping into the equation a value that would do the equation work.
Recommendations and Decisions
In decision of this instance. we learned that leasing and buying points for the intent of concern has different deductions on the fiscal position of the company. This is particularly true when the footings for each are different.
Another point to see is the future impact of either purchasing or renting a piece of equipment has on the hereafter of the company. Does the company hope to deprecate the value of a purchased piece of equipment and so derive some salvage value at the terminal. Could any salvage value come from taking this attack? Would at that place be any possible purchasers for the used equipment if it was yours to sell at the terminal of a utile life? These are all inquiries to see along with the NPV and footings and payments and fiscal stableness of the company when finding whether one should purchase or rent something.
I would urge that Mr. Jeffries take all the analysis he can see into history before doing his determination maintaining in head that the grosss and disbursals he will bring forth will be the same regardless of whether he leases or buys the carts. I would so pick the option with highest NPV and with the payments for both chief and involvement that make sense for his company.
