Case 27-2

Rock Creek Golf Club (RCGC) was a public golfcourse, owned by a private corporation. In January theclub's manager, Lee Jeffries, was faced with a decisioninvolving replacement of the club's fleet of 40 battery-powered golf carts. The old carts had been purchasedfive years ago, and had to be replaced. They were fullydepreciated; RCGC had been offered $200 cash foreach of them. 1. Assume that in order to purchase the carts, RCGCwould have to borrow $89,600 at 8 percent interestfor five years, repayable in five equal year-end in-stallments. Prepare an amortization schedule forthis loan, showing how much of each year's pay-ment is for interest and how much is applied torepay principal. (Round the amounts for each yearto the nearest dollar.)

2. Assume that salesperson B's company also wouldbe willing to sell the carts outright at $2,240 percart. Given the proposed lease terms, and assumingthe lease is outstanding for five years, what interestrate is implicit in the lease? (Ignore tax impacts tothe leasing company when calculating this implicitrate.) Why is this implicit rate different from the8 percent that RCGC may have to pay to borrow thefunds needed to purchase the carts?

3. Should RCGC buy the carts from A, or lease themfrom B? (Assume that if the carts are purchased,RCGC will use accelerated depreciation for incometax purposes, based on an estimated life of five yearsand an estimated residual value of $240 per cart. Theaccelerated depreciation percentages for years 1-5,respectively, are 35 percent, 26 percent, 15.6 per-cent, 11.7 percent, and 11.7 percent.)

4. Assume arbitrarily that purchasing the carts has anNPV that is $4,000 higher than the NPV of leasingthem. (This is an arbitrary difference for purposes ofthis question and is not to be used as a "check fig-ure" for your earlier calculations.) How much wouldB have to reduce the proposed annual lease paymentto make leasing as attractive as purchasing the cart?