Use the total-cost approach to determine the present value

Reference no: EM13572587

Bronzeville Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II, can be either purchased or leased from the manufacturer. The company has made the following evaluation of the two alternatives:

Purchase alternative. If the Zephyr II is purchased, then the costs incurred by the company would be as follows:


Purchase cost of the plane	$	780,000
Annual cost of servicing, licenses, and taxes	$	8,000
Repairs:
First three years, per year	$	3,000
Fourth year	$	5,000
Fifth year	$	10,000

The plane would be sold after five years. Based on current resale values, the company would be able to sell it for about one-half of its original cost at the end of the five-year period.

Lease alternative.If the Zephyr II is leased, then the company would have to make an immediate deposit of $55,000 to cover any damage during use. The lease would run for five years, at the end of which time the deposit would be refunded. The lease would require an annual rental payment of $130,000 (the first payment is due at the end of Year 1). As part of this lease cost, the manufacturer would provide all servicing and repairs, license the plane, and pay all taxes. At the end of the five-year period, the plane would revert to the manufacturer, as owner.

Bronzeville Products' required rate of return is 10%. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Required:
1a.	Use the total-cost approach to determine the present value of the cash flows associated with purchase alternative. (Outflows should be indicated with a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

Present value of cash flows with purchase alternative

1b.	Use the total-cost approach to determine the present value of the cash flows associated with lease alternative. (Outflows should be indicated with a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

Present value of cash flows with lease alternative

Which alternative would you recommend that the company accept?

	Lease alternative
	Purchase alternative

Reference no: EM13572587

Questions Cloud

At the end of each year for the next ten years you will : at the end of each year for the next ten years you will receive cash flows of 50. the initial investment is 320.

If sales are 525000 variable costs are 56 of sales and : if sales are 525000 variable costs are 56 of sales and operating incoe is 50000 what is the contribution margin

A group of economics students gathered to study for a test : a group of economics students gathered to study for a test on the money and banking system in the u.s. during a fast

Your understanding of the concepts discussed in the : your understanding of the concepts discussed in the thematic unit the individual and the collective conflict and

Use the total-cost approach to determine the present value : bronzeville products wants an airplane for use by its corporate staff. the airplane that the company wishes to acquire

A group of economics students gathered to study for a test : a group of economics students gathered to study for a test on the money and banking system in the u.s. during a fast

Mr chins granddaughter ling is 8 years old mr chin would : mr. chins granddaughter ling is 8 years old. mr. chin would like to help lings parents pay for lings college education.

At the end of 2007 carroll corporation a calendar year : at the end of 2007 carroll corporation a calendar year accrual basis c corporation wanted to make a contribution to a

I turns over it fixed assets 4 times a year it has : billard communication has total assets of 140000 and current assets of 600000. it turns over it fixed assets 4 times

User Account

All Pages