Question

Manchester Inc. must purchase $10,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 8% and would be amortized over 5 years, with 5 end-of-year payments. Manchester can also lease the equipment for 5 end-of-year payments of $2,300,000 each. How much larger or smaller is the bank loan payment than the lease payment?

		$185,163
		$196,854
		$204,565
		$217,324
		$238,456

Answer 1

Year	Principal	Principal Repayment	Remaining Amount	Interest @ 8%
0	$ 10,000,000.00	$                                    -	$         10,000,000.00	$        800,000.00
1	$ 10,000,000.00	$               2,000,000.00	$           8,000,000.00	$        640,000.00
2	$    8,000,000.00	$               2,000,000.00	$           6,000,000.00	$        480,000.00
3	$    6,000,000.00	$               2,000,000.00	$           4,000,000.00	$        320,000.00
4	$    4,000,000.00	$               2,000,000.00	$           2,000,000.00	$        160,000.00
5	$    2,000,000.00	$               2,000,000.00	$                                 -	$                          -
Total Interest amount	$    2,400,000.00
Principal Repayment	$ 10,000,000.00
Total Payment	$ 12,400,000.00
Yearly Lease Payment	$    2,300,000.00
No. of Years	5
Total Lease Payment	$ 11,500,000.00
Excess/(Short) Bank payments than Lease payments	$        900,000.00
Excess/(Short) Bank payments than Lease payments - Yearly	$        180,000.00