Recall that Bill sold the old equipment at his other location to a friend for $7,000 in Case 6.
He now has to replace the equipment, but is undecided about whether he should buy or lease the equipment. Bill could get the same bundle purchase price as he did for the new location if he buys it, but he can lease the equipment under a 3-year lease agreement. The annual rental payments are a lump sum payment of $12,000 for the first year and $10,000 for the next 2 years at the end of which he would have the option to purchase the equipment for $6000.
Required:
- Advise Bill on the advantages and disadvantages of replacing his old equipment by leasing it versus buying it and its effect on cash flows. Assume a market interest rate of 4%. You can access the present/future value tables on line for your calculations.(1-2 paragraph, use Word Document)
- Show the journal entries that would have to be recorded for the lease for years 1, 2,and 3 and eventual purchase at the end of year 3 under the assumption it is a) an operating lease and b) a capital lease. (use excel)
All information are in the Excel.
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