Reference no: EM131587516
Round Table Rental Yards provides construction equipment, trailers, crutches, etc., on short-term rentals. Historically, Art, the owner, has purchased the items that he rents out, but his business has been expanding so rapidly that he is considering both straight leases and lease-purchase arrangements. He has decided to use the procurement of a new bull dozer with a list price of $290,000 as a test case. If he purchases the bulldozer outright, then he must also decide whether he should plan on overhauling it or selling it after 3 years. This overhaul will cost $150,000, but it should double the useful life of the bulldozer. However, the bulldozer's value on the used market would drop from $180,000 after 3 years to $135,000 after 6 years. Its annual operation and maintenance costs will start at $25,000 and increase $7,500 each year. The manufacturer has a subsidiary that spealizes in financing through lease and lease-purchases. In both cases, the subsidiary uses a term of 5 years with no option to extend it further. For the standard lease, the annual payment is $45,000. For the lease-purchase, the annual payment increases by $42,000. For this lease Art would be responsible for the overhaul cost at year 3. Art will insure the bulldozer, the policy will cost him $9,500 each year. He will spend about 5% of the rental income transporting it to and from job sites. On the plus side, he expects it to bring in $175,000 the first year and should increase by $30,000 each year until it maxs out at $300,000 per year. If secured loans are available for 9%, which financing plan do you recommend?
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