Financing alternatives

Sevcik Resort needs to acquire a new tour boat that costs $80,000 and is expected to be useful for approximately five years. There are three alternatives for financing the acquisition of the boat:

• Alternative 1: Lease the boat for five years as a capital lease. There would be five lease payments of $20,128 each, the first of which would be paid on the date the boat was acquired.

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• Alternative 2: Purchase the boat outright for $80,000 from the proceeds of a $80,000, five-year, 8 percent note payable. The loan would require annual interest payments of $6,400 and repayment of the principal at the end of five years.

• Alternative 3: Sign a one-year lease for $20,128 with the option to renew the lease each year for the next five years. While the lease may be renewed, the amount of the lease may increase or decrease up to 10 percent.

Required:

What are the advantages and disadvantages of each of these financing alternatives?

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