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Your firm has to buy a new bulldozer. The life expectancy of the bulldozer is 5 years with no salvage value (worthless at end of 5 years). You can purchase a new bulldozer for an upfront cost of $200,000: your firm can borrow at 6% APR with quarterly compounding.
Alternatively you can lease a bulldozer for 5 years for a monthly lease payment of $4000 (paid at the end of each month).
a) Calculate the effective annual rate on your firm's borrowings. EAR = 0.0613636 = ((1 + 0.06/4)^4) - 1
b) Use a) to Calculate the monthly discount rate APR that you should use to evaluate the bulldozer lease.
c) What is the present value of the lease payments for the bulldozer delivery?
d) Calculate the lease rate for which you would be indifferent between leasing and buying the bulldozer (you will need to solve this with Excel and use the IRR function).
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