The Mainor School District is about to establish a 30-machine computer lab. It is considering six alternative means of acquiring and financing the machines:
1. Buy the machines outright; cost will be $60,000.
2. Buy the machines and finance them with a $60,000, three-year, 10 percent interest term note. The district will repay the note and pay the entire interest with a single payment of $79,860 when the note matures.
3. Buy the machines and finance them with a $60,000, three-year, 10 percent interest, installment note. The district will repay the note (plus interest) in three end-of-year installments of $24,127 each.
4. Lease the equipment under a standard operating lease. The district will make three end-of-year lease payments of $24,127 each.
5. Lease the equipment under an operating lease, but pre-pay the entire rent ($60,000) in advance.
6. Lease the equipment, but structure the lease so that it satisfies the criteria of a capital lease. The district will make three $24,127 end-of-year lease payments.
The district estimates that the equipment has a useful life of three years.
a. Prepare a table in which for each alternative you indicate the net expenditure that the district would record in its general fund in the year of purchase and the following two years. Ignore any expenditures that are offset by ‘‘other financing sources.’’ For the fifth option (the operating lease with the rent paid in advance), assume first that the district accounts for prepayments on the purchases basis and then that it accounts for them on the consumption basis.
b. Determine the present value (using a discount rate of 10 percent) of the cash payments under each option.
c. Comment on any incentives that district officials might have either to spread out the payments over the three-year period (either by a lease or borrowing arrangement) or to postpone the full payment until the third year, rather than to pay for the computers entirely in the year of acquisition.
d. Comment on any significant differences in how the six options would be accounted for in government-wide statements instead of governmental fund statements. How would each year’s reported expense be determined?