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The following are two popular approaches used by automobile dealers:

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4. The following are two popular approaches used by automobile dealers;(a) Cash Rebate Versus Low Rate Dealer Financing;You are given two mutually exclusive options from the dealer on a $20,000 car: (i) $1,500 cash rebate or (ii) 36-month low rate loan at 3% APR. The prevailing APR on 36-month auto loan from a typical bank is 8%. Which option is a better deal?;(b) Buying Versus Leasing;You are interested in a $25,000 car. A simplified leasing contract includes the following: (i) up- front cost of $3,000, (ii) $400 monthly lease payment over a 36-month period, and (iii) purchase cost of $12,000 at the end of the lease. What are the ?implied? APR and EAR of the lease? Should you lease the car or buy and finance the car with a loan from the bank in (a)?;5. You have been asked by the president of your firm to evaluate the proposed acquisition of new special-purpose equipment. The equipment's base price is $500,000, and another $50,000 for its installation costs. The equipment falls into the MACRS 3-year class, and it will be sold at the end of the project?s 2-year life for $250,000. Use of the equipment will require net working capital investment equivalent to 20% of the following year?s incremental revenues. The equipment will increase annual revenues by $100,000, and save the firm $200,000 in annual operating costs. The annual revenues and operating costs are expected to grow at an annual rate of 10% during the 2nd-year of the project. This equipment will be placed in an unoccupied site, which can otherwise be sold for $100,000 today. This site will be sold for the same price at the termination of the project. The depreciation of this site that your firm owns can be ignored. The firm's tax rate is 30 percent and the discount rate for the project is 12%.;Don't need A-C completed, just D. A-C are for your reference.;(a) Compute the initial outlay of the project.;(b) Compute the operating cash flows (OCF) in Years 1 and 2.;(c) Compute the non-operating cash flows (i.e., capital spending and change in NWC) at the end of;Year2.;(d) What is your recommendation on this project according to the conceptually most correct capital;budgeting method? Why? Be concise!;Additional Requirements

 

Paper#29733 | Written in 18-Jul-2015

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