You now know$---$from the previous reading $("$Lease vs$.$ Buy Example"$)---$that decision makers use Net Present Value $($NPV$)$ to calcuate the net present value of future cashflows of a proposed project.

Spacely Sprockets is considering options to acquire $$125,000$ of much needed new equipment but Project Manager George Jetson is uncertain whether to recommend $(1)$ securing a loan to purchase the equipment outright or $(2)$ leasing the equipment for five years. For this purchasing scenario$---$and unike the example in the reading$---$the annual loan payments are constant over the five year duration of the loan.

Open the attached MS Excel file, "Assignment $2-2",$ a comparison of cash flows for leasing and buying. MS Excel can calculate NPV automatically and you can see the NPV values for Leasing $($cell C$10)$ and Buying $($cell C$32)$ in the worksheet. Study the worksheet carefully but don't change any of the values $($for now$).$ Why do the annual lease payments get smaller each year? Because the present value of future payments gets smaller as the time between future and present increases.

Assumptions:

Interest Rate: $7\mathrm{.}1\%$

Tax Rate: $35\%$

Purchase Price: $$128,000$

Annual lease payments over $5$ years: $$27,234($in the spreadsheet, this value will change automatically if the Purchase Price changes$)$

Annual loan payments are constant year$-$to$-$year though the amount varies depending on the amount borrowed initially.

Straight$-$line depreciation for five years

Instructions:

In answering the questions below, you may find in necessary to change some values in the worksheet. Only the values in the spreadsheet in yellow$---$Interest Rate, Tax Rate, and Purchase Price$---$can be modified.

Questions:

Should George Jetson recommend to senior leadership that the equipment should be leased or purchased? Why?

If the interest rate rises to $7\mathrm{.}4\%$ and the Purchase Price and the Tax Rate are unchanged, should George Jetson recommend to senior leadership that the equipment should be leased or purchased? Why?

If the Seller reduces the Purchase Price by $$2000,$ should George Jetson recommend to senior leadership that the equipment should be leased or purchased? Why?

If the Purchase Rate remains unchanged at $$128,000$ and the Tax Rate remains unchanged at $35\%,$ at what Interest Rate is the difference in the NPV for leasing and the NPV for buying less than $$50?$

If the interest rate rises to $7\mathrm{.}65\%,$ the tax rate is decreased to $33\%,$ and the Purchase Price is increased by $$2000,$ should George Jetson recommend to senior leadership that the equipment should be leased or purchased? Why?