Question 1:

Option 1 Purchase without Finance

Cost of Capital 10%
Project's
Years Capital Cash Flows Residual Net Cash Discount Present Value
Discounted Investment (AT) value flows (AT) factor of Cash flows
0 -11,400,000 0 0 -11,400,000 1.000 -11,400,000
1 0 70,949 0 70,949 0.909 64,499
2 0 80,300 0 80,300 0.826 66,364
3 0 80,300 0 80,300 0.751 60,331
4 0 80,300 0 80,300 0.683 54,846
5 0 80,300 0 80,300 0.621 49,860
6 0 80,300 0 80,300 0.564 45,327
7 0 80,300 0 80,300 0.513 41,207
8 0 80,300 0 80,300 0.467 37,461
9 0 80,300 11,870,074 11,950,374 0.424 5,068,125
Total -11,400,000 713,349 -11,007,851 -5,911,981

NPV -5,911,981 5,488,019

IRR 1.13%
MCR (Max Capital at Risk) 11,400,000
B/C (Benefit to Cost ratio) 0.481

Option 2 Purchase with Finance

Cost of Capital 10%

Project's
Years Capital Cash Flows Residual Net Cash Discount Present Value
Discounted Investment (AT) value flows (AT) factor of Cash flows
0 -3,579,000 0 0 -3,579,000 1.000 -3,579,000
1 0 -503,617 0 -503,617 0.909 -457,834
2 0 -505,025 0 -505,025 0.826 -417,376
3 0 -510,180 0 -510,180 0.751 -383,306
4 0 -515,763 0 -515,763 0.683 -352,273
5 0 -521,809 0 -521,809 0.621 -324,002
6 0 -528,357 0 -528,357 0.564 -298,244
7 0 -535,449 0 -535,449 0.513 -274,770
8 0 -543,129 0 -543,129 0.467 -253,374
9 0 -551,446 5,727,858 5,176,412 0.424 2,195,304
Total -£3,579,000 -£4,714,775 -£6,135,394 -£4,144,874

NPV -4,144,874 -565,874

IRR -6.21%
MCR (Max Capital at Risk) 6,340,178
B/C (Benefit to Cost ratio) 0.346

Option 2 Lease
Cost of Capital 10%

Project's
Years Capital Cash Flows Residual Net Cash Discount Present Value
Discounted Investment (AT) value flows (AT) factor of Cash flows
0 0 0 0 0 1.000 0
1 0 -660,000 0 -660,000 0.909 -600,000
2 0 -660,000 0 -660,000 0.826 -545,455
 3 0 -660,000 0 -660,000 0.751 -495,868
4 0 -660,000 0 -660,000 0.683 -450,789
5 0 -660,000 0 -660,000 0.621 -409,808
6 0 -726,000 0 -726,000 0.564 -409,808
7 0 -726,000 0 -726,000 0.513 -372,553
8 0 -726,000 0 -726,000 0.467 -338,684
9 0 -726,000 0 -726,000 0.424 -307,895
Total 0 -6,204,000 -3,300,000 -3,930,859

NPV -3,930,859
 Amounts in $

Cum. discounted
cash flow
-11,400,000
-11,335,501
-11,269,137
-11,208,807
-11,153,961
-11,104,101
-11,058,773
-11,017,567
-10,980,106
-5,911,981

Amounts in $

Cum. discounted
cash flow
-3,579,000
-4,036,834
-4,454,210
-4,837,515
-5,189,789
-5,513,791
-5,812,035
-6,086,805
-6,340,178
-4,144,874

Amounts in $

Cum. discounted
cash flow
0
-600,000
-1,145,455
-1,641,322
-2,092,111
-2,501,919
-2,911,727
-3,284,280
-3,622,964
-3,930,859
 YearsPresent Value of Cash flows
Purchase without Purchase with PV = Cash
discounted Purchase Flow / (1
without + r) ^with
Purchase t
End of Year Financing Financing Lease (t) Finance Financing Lease Purchase vs lease

1 -11400000 -3579000 0 0 -11,400,000 -3,579,000 0 -7821000

0
2 70,949 -503617 -660000 1 64,499 -457,834 -600,000 574566
3 80,300 -505025 -660000 2 66,364 -417,376 -545,455 585,325
4 80,300 -510180 -660000 3 60,331 -383,306 -495,868 590480
5 80,300 -515763 -660000 4 54,846 -352,273 -450,789 596063
6 80,300 -521809 -660000 5 49,860 -324,002 -409,808 602109
7 80,300 -528357 -726000 6 45,327 -298,244 -409,808 608657
8 80,300 -535449 -726000 7 41,207 -274,770 -372,553 615749
9 80,300 -543129 -726000 8 37,461 -253,374 -338,684 623429
10 80,300 -551446 -726000 9 34,055 -233,867 -307,895 631746
0
0
Residual Value 11,870,074 5,727,858 9 5,034,070 2,429,171 0 6142216

NPV -5,911,981 -4,144,874 -3,930,859 irr

214,015
 ###

Purchase vs lease Cash Flows After Tax ($)

Discounted
Years 1 Minus 3 2 minus 3 1 vs 2
0 -11400000 -3579000 -7821000
1 730,949 156383 574566
2 740,300 154975 585325
3 740,300 149820 590480
4 740,300 144237 596063
5 740,300 138191 602109
6 806,300 197643 608657
7 806,300 190551 615749
8 806,300 182871 623429
9 12,676,374 5902412 6773962
IRR Differetial 7% 9% 6%
 IRR Purchase se with Finance Lease

0.0% 1,183,423 (2,565,917) (6,204,000)

1.0% 131,874 (2,825,732) (5,898,602)
2.0% (821,393) (3,055,486) (5,614,696)
3.0% (1,686,431) (3,258,558) (5,350,454)
4.0% (2,472,178) (3,437,931) (5,104,230)
5.0% (3,186,592) (3,596,242) (4,874,533)
6.0% (3,836,767) (3,735,827) (4,660,013)
7.0% (4,429,032) (3,858,751) (4,459,446)
8.0% (4,969,041) (3,966,847) (4,271,722)
9.0% (5,461,849) (4,061,741) (4,095,832)
10.0% (5,911,981) (4,144,874) (3,930,859)
11.0% (6,323,493) (4,217,530) (3,775,967)
12.0% (6,700,023) (4,280,849) (3,630,394)
13.0% (7,044,836) (4,335,844) (3,493,444)
14.0% (7,360,867) (4,383,420) (3,364,483)
15.0% (7,650,757) (4,424,380) (3,242,928)
16.0% (7,916,884) (4,459,443) (3,128,247)

Discount Rate Sensitivity

Option (1) IRR Firms opportunity Cost
$2,000,000

a b c
$0
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 1

-$2,000,000
NPV

-$4,000,000

-$6,000,000

Purchase
-$8,000,000 Purchase with Finance
Lease

-$10,000,000
Years from
Project Option 1: PV of Purchase without Finance
Launch
0 Initial Capital Investment + PV of Purchase without Finance

1 Relevant Benefits (Rental Savings)

9 Relevant Benefits (Rental Savings) + Residual Value

hout Finance
 Option 1 Option 2
Purchase without Purchase with
Finance Finance
NPV $ -5,911,981 $ -4,144,874

0.519 -0.8419
 Option 3

Lease
$ -3,930,859
profitability index = npv of cash inflows / iinitial invesment
iinitial invesment
Option 1 Purchase without Finance

Discount rate 10%

Discounted year 0 1 2 3 4
Capital Investment -11,400,000
Relavent Savings 70,949 80,300 80,300 80,300
Residual value
Cash flows -11,400,000 70,949 80,300 80,300 80,300

Discount factor 1.000 0.909 0.826 0.751 0.683

Discounted cash flow -11,400,000 64,499 66,364 60,331 54,846
Cum. discounted cash flow -11,400,000 -11,335,501 -11,269,137 -11,208,807 -11,153,961

NPV -5,911,981
IRR 1.13%
MCR (Max Capital at Risk) 11,400,000
B/C (Benefit to Cost ratio) 0.481

Option 2 Purchase with Finance

Discount rate 10%

Discounted year 0 1 2 3 4
Income 0 -503,617 -505,025 -510,180 -515,763
Capital -3579000 0 0 0 0
Cash flow -3,579,000 -503,617 -505,025 -510,180 -515,763

Discount factor 1.0000 0.9091 0.8264 0.7513 0.6830

Discounted cash flow -3,579,000 -457,834 -417,376 -383,306 -352,273
Cum. discounted cash flow -3,579,000 -4,036,834 -4,454,210 -4,837,515 -5,189,789

NPV -4,144,874
IRR -6.21%
MCR (Max Capital at Risk) 6,340,178
B/C (Benefit to Cost ratio) 0.346

Option 3 Lease

Discount rate 10%

Discounted year 0 1 2 3 4
Income 0 -660,000 -660,000 -660,000 -660,000
Capital 0 0 0 0
Cash flow 0 -660,000 -660,000 -660,000 -660,000

Discount factor 1 1 1 1 1
Discounted cash flow 0 -600,000 -545,455 -495,868 -450,789
Cum. discounted cash flow 0 -600,000 -1,145,455 -1,641,322 -2,092,111
NPV -3,930,859
IRR Err:523
MCR (Max Capital at Risk) 3,930,859
B/C (Benefit to Cost ratio) 0.000
 5 6 7 8 9 Total
-11,400,000
80,300 80,300 80,300 80,300 80,300 713,349
11,870,074
80,300 80,300 80,300 80,300 11,950,374 -11,007,851

0.621 0.564 0.513 0.467 0.424

49,860 45,327 41,207 37,461 5,068,125 -5,911,981
-11,104,101 -11,058,773 -11,017,567 -10,980,106 -5,911,981

5 6 7 8 9 Total
-521,809 -528,357 -535,449 -543,129 -551,446 -4,714,775
0 0 0 5,727,858 2,148,858
-521,809 -528,357 -535,449 -543,129 5,176,412 -2,565,917

0.6209 0.5645 0.5132 0.4665 0.4241

-324,002 -298,244 -274,770 -253,374 2,195,304 -5,513,791
-5,513,791 -5,812,035 -6,086,805 -6,340,178 -4,144,874

-503617
-505025
-510180
-515763
-521809
-528357
-535449
-543129
-551446
5 6 7 8 9 Total
-660,000 -726,000 -726,000 -726,000 -726,000 -6,204,000
0 0 0 0 5,727,858
-660,000 -726,000 -726,000 -726,000 -726,000 -6,204,000

1 1 1 0 0
-409,808 -409,808 -372,553 -338,684 -307,895 -3,930,859
-2,501,919 -2,911,727 -3,284,280 -3,622,964 -3,930,859