Cat Co. has decided that it needs ten new modern buses The buses cost $200,000 each for a total of $2million.

Cat Co. has decided that it needs ten new modern buses

The buses cost $200,000 each for a total of $2million. To obtain these buses, two alternative financial arrangements are available to the company.

1. It can use the facilities of a bank for a term loan of five years at the interest rate of 20%. If the company is to take this loan and pay cash to the

manufacturer, the list price will be cut by 10%, to $180,000 per bus.

2. The bus builder can also act as a lessor and offer a five-year lease to Cat Co. so that Cat Co. can obtain use of Buses without purchasing them. The

arrangement calls for Cat Co.to pay $500,000 at the beginning of each year for five years. If the company is to take this option, the (LPA), an organization that promotes leasing contracts, will pay Cat Co. $160,000 at the end of year 5.

The investment can be depreciated for tax purposes at a 50% declining rate. The capital cost of the buses will be added to the existing pool of Cat Co.

The buses will only be good for scrap after five years. The scrap value is estimated to be $12,000 per bus for a total of $120,000.

Cat Co. will not pay tax for the foreseeable future but the manufacturer's tax rate is 50%.

(a) Should Cat Co. buy or lease the buses? Show your work.

(b) What is the NPVlease for the manufacturer?