Rock Creek Golf Club (RCGC) was a public golf course, owned by a private corporation. In January the club's manager, Lee Jeffries, was faced with a decision involving replacement of the club's fleet of 40 battery-powered golf carts. The old carts had been purchased five years ago, and had to be replaced. They were fully depreciated; RCGC had been offered $200 cash for each of them.
Questions
1. Assume that in order to purchase the carts, RCGC would have to borrow $89,600 at 8 percent interest for five years, repayable in five equal year-end installments. Prepare an amortization schedule for this loan, showing how much of each year's payment is for interest and how much is applied to repay principal. (Round the amounts for each year to the nearest dollar.)
2. Assume that salesperson B's company also would be willing to sell the carts outright at $2,240 per cart. Given the proposed lease terms, and assuming the lease is outstanding for five years, what interest rate is implicit in the lease? (Ignore tax impacts to the leasing company when calculating this implicit rate.) Why is this implicit rate different from the 8 percent that RCGC may have to pay to borrow the funds needed to purchase the carts?
3. Should RCGC buy the carts from A, or lease them from B? (Assume that if the carts are purchased, RCGC will use accelerated depreciation for income tax purposes, based on an estimated life of five years and an estimated residual value of $240 per cart. The accelerated depreciation percentages for years 1-5, respectively, are 35 percent, 26 percent, 15.6 percent, 11.7 percent, and 11.7 percent.)
4. Assume arbitrarily that purchasing the carts has an NPV that is $4,000 higher than the NPV of leasing them. (This is an arbitrary difference for purposes of this question and is not to be used as a "check figure" for your earlier calculations.) How much would B have to reduce the proposed annual lease payment to make leasing as attractive as purchasing the cart?