NEW EQUIPMENT - TO PAY CASH, RENT, GET A LOAN, OR LEASE? EAGLE SOAR needs new, state of the art equipment. The managemen
Posted: Tue Apr 26, 2022 7:15 pm
NEW EQUIPMENT - TO PAY CASH, RENT, GET A LOAN, OR
LEASE?
EAGLE SOAR needs new, state of the art equipment. The management
team has already identified a vendor for this equipment and a
package that costs $50,000.
EAGLE SOAR has $65,000 in cash reserves and other assets
available to make this purchase. You budget $5,000 in monthly
operating expenses and set aside $500 per month in your reserve
account.
If you rent the equipment there is no up-front cash expenditure,
except for a $1,000 security deposit. You will face lower upkeep
and repair costs. You can also return the equipment if you are not
satisfied. The monthly rental fee is $1,200 and it is 100% tax
deductible.
A local bank is willing to extend you a simple interest business
loan (multiply principle by interest rate to calculate finance
charges) of $40,000 over 5 years at 4% with no money down. They
will not offer the full amount because equipment will depreciate
and they want to minimize their exposure (i.e., financial
risk).
Since you have excellent credit and good cash flow the vendor
offers to a "lease to own plan" to you the
equipment. They are offering 100% financing over 5 years. Their
terms are a 3% down payment that would cover any taxes,
installation, and delivery expenses. You would pay $980 per month.
Similar to renting, lease payments are tax deductible.
Your new manager tells you that EAGLE SOAR averages a quarterly
profit before taxes of $18,000 and your tax rate is 30% (Federal
and State combined).
QUESTIONS
1. What are the different ways you can purchase this equipment
AND what is your upfront cost for each option?
2. What is your monthly cost for each option over the next 5
years? (Note: disregard maintenance)
3. What is your total cost for each option over the next 5
years? (Note: disregard maintenance and depreciation)
4. What is your project monthly tax liability under each
option?
5. What is your recommendation to the manager about how to pay
for the equipment? Use the information above to justify your
rationale and response.
LEASE?
EAGLE SOAR needs new, state of the art equipment. The management
team has already identified a vendor for this equipment and a
package that costs $50,000.
EAGLE SOAR has $65,000 in cash reserves and other assets
available to make this purchase. You budget $5,000 in monthly
operating expenses and set aside $500 per month in your reserve
account.
If you rent the equipment there is no up-front cash expenditure,
except for a $1,000 security deposit. You will face lower upkeep
and repair costs. You can also return the equipment if you are not
satisfied. The monthly rental fee is $1,200 and it is 100% tax
deductible.
A local bank is willing to extend you a simple interest business
loan (multiply principle by interest rate to calculate finance
charges) of $40,000 over 5 years at 4% with no money down. They
will not offer the full amount because equipment will depreciate
and they want to minimize their exposure (i.e., financial
risk).
Since you have excellent credit and good cash flow the vendor
offers to a "lease to own plan" to you the
equipment. They are offering 100% financing over 5 years. Their
terms are a 3% down payment that would cover any taxes,
installation, and delivery expenses. You would pay $980 per month.
Similar to renting, lease payments are tax deductible.
Your new manager tells you that EAGLE SOAR averages a quarterly
profit before taxes of $18,000 and your tax rate is 30% (Federal
and State combined).
QUESTIONS
1. What are the different ways you can purchase this equipment
AND what is your upfront cost for each option?
2. What is your monthly cost for each option over the next 5
years? (Note: disregard maintenance)
3. What is your total cost for each option over the next 5
years? (Note: disregard maintenance and depreciation)
4. What is your project monthly tax liability under each
option?
5. What is your recommendation to the manager about how to pay
for the equipment? Use the information above to justify your
rationale and response.