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Angelo Rossi opened little Italian restaurant almost 25 years ago in the heart of NY. Over the time business has grown significantly, however it appeared time for some equipment to be changed. The total cost of new equipment including delivery and installation was estimated to be $100,000. 3-year MACRS rates could be used to depreciate the equipment. The money for the equipment could be borrowed from the bank at a rate of 10% per year over 5-year term. On the other hand it could be leased from AAA Leasing Company for an annual lease payment of $25,000 over 5-year term. Lease would carry an option to buy the equipment for $40,000 at the end of 5th year. Maintenance cost is $2,000 per year, would be covered by annual lease payment. The increased efficiency of the new equipment was expected to result in net cost savings of $4,000 per year.
Determine the following: 1) Calculate NAL the restaurant equipment. Its assumed that old equipment has no resale value whereas new one would have a salvage value of $30,000 after 5years. Restaurants tax rate is 40%.
2) After doing all calculations, Angelo realizes that he underestimated the cost savings that would result from improved efficiency by $1,000 per year. How this should be handled? Is it relevant? Explain.
3)What is the maximum lease payment that Angelo should be willing to pay? Explain In excel.