Reroorganic-farms (RF) Inc. has to decide whether to buy or lease the autonomous tractors from Johnn
Reeres (JR) Inc. The cost of one autonomous tractor is $750,000. Farm machinery will be depreciated
using a straight line depreciation for 6 years. The useful life of the machine is 6 years. The corporate
tax rate is 25%. Capital Financing (CF) a heavy equipment financing firm has offered RF Inc. a 6-year
loan for $750,000. The repayment schedule would be Equal Annual Payments with an interest charge
of 8% on the beginning outstanding balance of the loan each year for 6 years. Both principal repayments
and interest payments are due at the end of the year. Johnn Reeres has a leasing department that has
offered to lease the tractor for $1,50,000 per year to RF Inc payable at the end of each of the 6 years of
the lease (starting Year 1).
5.1 Write the loan amortization schedule with Equal annual installments (EAI), principal
payments, interest payments, and closing and ending balances of the loan.
[5 marks]
5.2 Should RF Inc. lease the tractor or buy it with bank financing? Solve for NAL (Net
advantage to leasing) showing all steps and answer.
[10 marks]
5.3 At what lease payments will RF Inc be indifferent between buying over leasing? [5 marks]
Answer below:
5.1 Loan
amortization
schedule
BEGINNING
BALANCE
ΕΑΙ
Interest
Principal
Ending balance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6