What are the four options to purchase this equipment? What is your upfront cost for all options to purchase this equipment?

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NEW EQUIPMENT-TOPAYCASH,RENT,GETALOAN,ORLEASE?
ESF needs new, state of the art equipment. The management team has already identified a vendor for this equipment and a package that costs $50,000. Your manager would like you to present how you would like to purchase this equipment. Answer the questions below and present your recommendation to your manager based on the information provided.ESF has $60,000 in cash reserves and other assets available to make this purchase. You currently average $4,000 in monthly operating expenses and are setting aside $500 per month in your reserve account.If you rent the equipment there is no up-front cash expenditure, except for a $1,000 security deposit. You will face lower upkeep and repair costs. You can also return the equipment if you are not satisfied. The monthly rental fee is $1,200 and it is 100% tax deductible.A local bank is willing to extend you a simple interest business loan (multiply principle by interest rate to calculate finance charges) of $40,000 over 5 years at 4% with no money down. They will not offer the full amount because equipment will depreciate and they want to minimize their exposure (i.e., financial risk).Since you have excellent credit and good cash flow the vendor offers to a”lease toown plan” toyou for the equipment. They are offering 100% financing over 5 years. Their terms are a 3% down payment that would cover any taxes, installation, and delivery expenses. You would pay $980 per month. Similar to renting, lease payments are tax deductible.Your manager tells you that EAGLE SOAR averages a quarterly profit before taxes of $15,000 and your tax rate is 30% (Federal and State combined). Also, she prefers to always have at least 3 months (or one quarters) worth of operating expenses in reserves. However, this is not required but there must be a plan to replenish the reserve account within 6 months if it falls below 3 months’ worth of operating expenses.

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QUESTIONS

1. What are the four options to purchase this equipment?

2. What is your upfront cost for all options to purchase this equipment?

3. What is your monthly cost for all options over the next 5 years? (Note: disregard maintenance)

4. What is your total cost for all options over the next 5 years? (Note: disregard maintenance and depreciation)5. What is your recommendation to the manager about how to pay for the equipment? Use the information above to justify your rationale and response.

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