A$.$ Short Answer Question

$1.$ 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 Net Cash Flow Present Value of Net Cash Flow

Year $0($$$506,400)($$$506,400)$

Year $1$ $$117,600$ $$107,890$

Year $2$ $$132,000$ $$111,102$

Year $3$ $$116,400$ $$89,882$

Year $4$ $$108,000$ $$76,510$

Year $5$ $$116,400$ $$0$

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? $($$$121,016)$

c$)$ Based on your answer to b$),$ should Leasing International purchase these ambulances and lease them out? Explain why or why not.

d$)$ How would Leasing International find the internal rate of return $($IRR$)$ to this investment? Just set up the problem, you do not have to solve for the internal rate of return.

e$)$ Suppose interest rates in the market decreased from $9\%$ to $7\%.$ Indicate whether each of the following would increase or decrease:

Net cash flows in the table above: $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Present Values of Net Cash Flows: $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

Net Present Value of the Investment: $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$