To grader/TA: for case study questions 1 and 2: if a student gets the correct conclusion and shows correct analysis, give 2.0/2.0 for each question; if a student gets the correct conclusion and the majority of the analysis is correct with some minor errors, or if a student gets the wrong conclusion though the analysis process is actually correct, give 1.5/2.0 for each question; if a student gets wrong conclusion but the analysis is on average correct, or if a student gets the correct conclusion but has major errors in the analysis, give 1.0/2.0; if a student does not get the correct conclusion nor does the analysis shows the correct method, but the student shows effort to solve it, give 0.5/2.0.
Part I: Case Study: Riverbend Telephone Company (5 points)
1. Considering the present value of future cash flows, should the company buy or lease the new truck? Assume that Riverbend uses the straight-line depreciation method. (You need to take into account the cash effect from taxes.) (2 points)
Notice that this lease should be treated as a capital lease for financial report purpose. However, for the purpose of analyzing the difference between buy and lease, let’s treat Riverbend’s lease as an operating lease in this exercise (but Riverbend is still responsible for some costs of operation and maintenance, as described in the case).
Also notice that if investing in the truck, it must bring a return of at least 12%. Therefore we use 12% as the interest rate.
In addition, notice that Riverbend pays the annual charge on the first day of each year.
|Cash flows |0 |1 |2 |3 |4 |5 |
|Buy | | | | | | |
|price |-24,300 | | |...