An amortization table has been completed regarding the potential loan that RCGC would need to obtain n order to fund the purchase of 40 gasoline powered golf carts. RCGC would need to obtain a loan for $89600 at an eight percent interest rate for five years with a payment due at the end of each year in order to fund the purchase. A payment in the amount of 22439 will be due at the end of each year for five years the duration of the loan. Total interest paid will be 22605 over the course of the loan. When you factor in the eight percent annual interest over the course of five years, the 40 golf carts will cost a total of 112195 to purchase outright 89600 in principal and22604 in interest the table listed in exhibit a shows how much principal interest will be paid in each year along with the remaining balance following each payment
There are two scenarios to answer this question. First scenario RCBB purchases the carts using its own funds and we calculate the NPV at 9% and the second scenario is that RCGB purchases the carts using borrowed money @ 9% payable in five years amortization table 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 options, we can see that the NPV @9% of the lease option is higher by9826 versus 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
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