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3. Reynolds Leasing is a company that purchases equipment and then leases the equipment to hospitals. Reynolds is considering the purchase of diagnostic equipment that
3. Reynolds Leasing is a company that purchases equipment and then leases the equipment to hospitals. Reynolds is considering the purchase of diagnostic equipment that would cost them $300,000 to purchase. Reynolds would lease out the equipment to a hospital on a four-year lease, and then sell the equipment at a reduced price. Based on the lease payments that Reynolds would receive from the hospital, the maintenance costs, the expected resale price, and other issues, Reynolds is predicting the annual net cash flows as shown below: a) Note the first year Reynolds Leasing has a negative cash flow. Reynolds Leasing's corporate cost of capital is 9%. Paste these values into an Excel file. Using the proper function, find the net present value of Reynolds Leasing's entire investment over this five-year period. b) Given this net present value, should Reynolds make this investment? Why or why not? c) In the Excel file, find the internal rate of return on this investment. Compare this rate of return to 9%. Why is the internal rate of return hiqher or lower than 9% ? d) Suppose Reynolds leasing expects interest rates to significantly decrease next month and to stay lower for the next 5 years. Lower interest rates will cause the present values of the net cash flows in Year 1-4 to and the net present value of the investment to A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase e) About how much would interest rates need to change in order for Reynolds to consider this a profitable capital investment? A) Interest rates would need to increase about 1 percentage point. B) Interest rates would need to decrease about 1 percentage point. C) Interest rates would need to increase at least 2 percentaqe points. D) Interest rates would need to decrease at least 2 percentage points
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