ECON 375 A. Short Answer Question Practice Assignment 8 1. Leasing International plans to purchase three...
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ECON 375 A. Short Answer Question Practice Assignment 8 1. Leasing International plans to purchase three new ambulances and to lease these ambulances to MNO Emergency Services (MNO will lease the ambulances the same way that you or I may lease a car). The terms of the lease offered by Leasing International call for MNO to make a payment of $123,000 at the beginning of each year of a five-year lease. It will cost Leasing International $600,000 to purchase the ambulances. After accounting for maintenance, depreciation, and taxes, the net cash flow for Leasing International in each year of the lease is shown below (they purchase ambulances in Year 0): Year Year 0 Net Cash Flow ($506,400) Present Value of Net Cash Flow Year 1 $117,600 Year 2 $132,000 Year 3 $116,400 Year 4 Year 5 $108,000 $116,400 Leasing International's discount rate is 9%. They plan to sell the ambulances in Year 5. This sale is included in the net cash flow for Year 5 in the table above. a) Find the present value of Leasing International's net cash flow each year in the table above. b) What is the net present value of the entire investment? c) Based on your answer to b), should Leasing International purchase these ambulances and lease them out? Explain why or why not. ECON 375 A. Short Answer Question Practice Assignment 8 1. Leasing International plans to purchase three new ambulances and to lease these ambulances to MNO Emergency Services (MNO will lease the ambulances the same way that you or I may lease a car). The terms of the lease offered by Leasing International call for MNO to make a payment of $123,000 at the beginning of each year of a five-year lease. It will cost Leasing International $600,000 to purchase the ambulances. After accounting for maintenance, depreciation, and taxes, the net cash flow for Leasing International in each year of the lease is shown below (they purchase ambulances in Year 0): Year Year 0 Net Cash Flow ($506,400) Present Value of Net Cash Flow Year 1 $117,600 Year 2 $132,000 Year 3 $116,400 Year 4 Year 5 $108,000 $116,400 Leasing International's discount rate is 9%. They plan to sell the ambulances in Year 5. This sale is included in the net cash flow for Year 5 in the table above. a) Find the present value of Leasing International's net cash flow each year in the table above. b) What is the net present value of the entire investment? c) Based on your answer to b), should Leasing International purchase these ambulances and lease them out? Explain why or why not.
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