Rock Creek Golf

Topics: Present value, Lease, Business terms Pages: 3 (533 words) Published: April 22, 2015
Case VI: Rock Creek Golf Club
1. Amortization schedule for the loan of $89,600 at a rate of 8% for a term of 5 years, present value factor 3.993, and an annual installment of $22,440: Year
Balance of Principal (Jan. 1)
Equal Annual Payment
Payment of Interest
Reduction of Principal
Ending Balance of Principal
0
$89,600

1
$89,600
$22,440
$7,168
$15,272
$74,328
2
$74,328
$22,440
$5,946
$16,494
$57,834
3
$57,834
$22,440
$4,626
$17,814
$40,020
4
$40,020
$22,440
$3,201
$19,239
$20,781
5
$20,781
$22,440
$1,662
$20,778
0

2. Given the proposed lease terms, and assuming that broker B would be willing to sell the carts outright at $2,240 and assuming the lease is outstanding for 5 years, the implicit interest rate of the lease can be determined as follows:

Present Value = Payment * (PV factor for n = 5 yrs, i = unknown)
$2,240 = $500 * (PV factor for n = 5 yrs, i = unknown)
4.48 = (PV factor for n = 5 yrs, i = unknown)
From table of present value annuity factors, 4.48 is approximately 4.452 ~ 4% at 5 years.

Therefore, the implicit interest rate in the lease is approximately i = 4% per year. One explanation for why this implicit interest rate of 4% would be different from the interest rate of 8% (or about half) that RCGC would have to pay to borrow the funds needed to purchase the carts is that RCGC would be asking for more borrowed cash up front than would be needed to spend 5 chunks of $500 over the next 5 years, as was mentioned in the case.

3. Going with Salesperson A: Buy the carts at $2,240 each = $89,600 (less $8,000 from sale of old fleet = $81,600) (Accelerated Depreciation: Yr 1 = 35%, Yr 2 = 26%, Yr 3 = 15.6%, Yr 4 = 11.7%, Yr 5 =11.7%) Year

Revenue
Fleet Purchase
Scrap Value
Operating Costs
EBITDA
Interest
Depreciation
EBT
Tax 34%
Net Earnings
Discount Factor
NPV
0

(81,600)

(81,600)
1
84,000

(16,800)
67,200
(7,168)
(28,000)
32,032
(10,891)...
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