Required Problem. Your work on the following problem is to be submitted for grading by the posted due date. Art's Rental Equipment provides construction equipment, trailers, tools, etc., on short- term rentals. Historically, the owner (Art) has paid full price at the time of purchase for all the items that he rents out. However, he now wants to consider considering acquiring those items by either paying for them over time or by leasing them. He has decided to use the purchase of a large bulldozer with a list price of $680,000 as a test case. The following are three options for obtaining a new bulldozer that Art developed after negotiation with the manufacturer: 1. Pay in full at the time of sale at an amount equal to the list price less a 3% discount for paying in cash. 2. Pay for the new bulldozer with an eight-year loan. In this case, Art also would be required to make an initial down payment of 25% of the list price but would then then pay off the balance in eight uniform annual payments calculated at an annual interest rate of 12.00%. 3. Lease a new bulldozer for a four-year term at a cost of $136,000 per year, each year paid in advance. If Art purchases the bulldozer by paying for it in full at the time of sale, he will own it and, thus, could sell it for its salvage value whenever desired. Art estimates that the salvage value would be $340,000 after four years and $170,000 after eight years. These estimates are based on the fact that Art expects a bulldozer to have a useful life of eight years. Art has decided that he will definitely replace the bulldozer after eight years of use, but he also would be willing to consider replacing it with a new one after four years if it were to be cost effective to do so. On the other hand, if Art pays for the bulldozer using the 8-year loan, he would keep it for full eight-year period and, only then, replace it with a new one. Note, of course, that Art will fully own the bulldozer after all eight annual payments are made. If the bulldozer is leased, it must be returned to the manufacturer at the end of the four-year lease period. At that time, another new bulldozer would be leased. Regardless of how the bulldozer is obtained, operating and maintenance costs will be incurred every year and are expected to start at $20,000 in the first year and increase by 10% each year thereafter. And whether the bulldozer is purchased or leased, it also must be insured it for theft, catastrophic damage, and liability at a cost of $9,400 each year. Art also expects he will spend about 20% of the rental income the bulldozer generates transporting it to and from job sites but, on the plus side, he expects the rental income to be $250,000 every year. Like most rental or lease agreements, the first year's cost is due at the time the lease is initiated with each subsequent payment due exactly one year after that date. * This actually is short for a bulldozer of this type, but Art's customers expect the equipment they rent to be in good condition. What would you recommend Art to do, and why? In developing your recommendation, be sure to clearly: Identify all the alternatives being considered; If needed, identify any additional assumptions you need to make and indicate why you think these are both necessary and reasonable. Assume that doing nothing is not a viable alternative. Compare the alternatives on an appropriate basis (ie., using either present worth or equivalent uniform annual worth analysis) and taking the time value of money into account using an interest rate of 18%; Show the calculations you perform; and State your final recommendation. Required Problem. Your work on the following problem is to be submitted for grading by the posted due date. Art's Rental Equipment provides construction equipment, trailers, tools, etc., on short- term rentals. Historically, the owner (Art) has paid full price at the time of purchase for all the items that he rents out. However, he now wants to consider considering acquiring those items by either paying for them over time or by leasing them. He has decided to use the purchase of a large bulldozer with a list price of $680,000 as a test case. The following are three options for obtaining a new bulldozer that Art developed after negotiation with the manufacturer: 1. Pay in full at the time of sale at an amount equal to the list price less a 3% discount for paying in cash. 2. Pay for the new bulldozer with an eight-year loan. In this case, Art also would be required to make an initial down payment of 25% of the list price but would then then pay off the balance in eight uniform annual payments calculated at an annual interest rate of 12.00%. 3. Lease a new bulldozer for a four-year term at a cost of $136,000 per year, each year paid in advance. If Art purchases the bulldozer by paying for it in full at the time of sale, he will own it and, thus, could sell it for its salvage value whenever desired. Art estimates that the salvage value would be $340,000 after four years and $170,000 after eight years. These estimates are based on the fact that Art expects a bulldozer to have a useful life of eight years. Art has decided that he will definitely replace the bulldozer after eight years of use, but he also would be willing to consider replacing it with a new one after four years if it were to be cost effective to do so. On the other hand, if Art pays for the bulldozer using the 8-year loan, he would keep it for full eight-year period and, only then, replace it with a new one. Note, of course, that Art will fully own the bulldozer after all eight annual payments are made. If the bulldozer is leased, it must be returned to the manufacturer at the end of the four-year lease period. At that time, another new bulldozer would be leased. Regardless of how the bulldozer is obtained, operating and maintenance costs will be incurred every year and are expected to start at $20,000 in the first year and increase by 10% each year thereafter. And whether the bulldozer is purchased or leased, it also must be insured it for theft, catastrophic damage, and liability at a cost of $9,400 each year. Art also expects he will spend about 20% of the rental income the bulldozer generates transporting it to and from job sites but, on the plus side, he expects the rental income to be $250,000 every year. Like most rental or lease agreements, the first year's cost is due at the time the lease is initiated with each subsequent payment due exactly one year after that date. * This actually is short for a bulldozer of this type, but Art's customers expect the equipment they rent to be in good condition. What would you recommend Art to do, and why? In developing your recommendation, be sure to clearly: Identify all the alternatives being considered; If needed, identify any additional assumptions you need to make and indicate why you think these are both necessary and reasonable. Assume that doing nothing is not a viable alternative. Compare the alternatives on an appropriate basis (ie., using either present worth or equivalent uniform annual worth analysis) and taking the time value of money into account using an interest rate of 18%; Show the calculations you perform; and State your final recommendation