1. Avro Arrow Co. (AAC) needs a machine with a purchase price of $100,000 for the next 3 years. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Consider the following information: Relevant depreciation rates are 30%, 20 %, 15%, 15%, 10 %, 10% for years 1-6. ● Whether buying or leasing, AAC will have to pay maintenance of $5,000 at the end of each year. AAC's tax rate is 25%. ● ● ● ● . The machine's residual value at the end of three years would be $40,000. You can assume the lease would qualify as a tax-oriented lease. What is the net advantage to leasing (NAL)? Should the company buy or lease the machine? The loan would have an interest rate of 12%. It would be nonamortizing, with only interest paid at the end of each year for three years, and the principal repaid at the end of Year 3. Lease terms call for payments of $30,000 at the end of each of the next 3 years. ●
1. Avro Arrow Co. (AAC) needs a machine with a purchase price of $100,000 for the next 3 years. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Consider the following information: Relevant depreciation rates are 30%, 20 %, 15%, 15%, 10 %, 10% for years 1-6. ● Whether buying or leasing, AAC will have to pay maintenance of $5,000 at the end of each year. AAC's tax rate is 25%. ● ● ● ● . The machine's residual value at the end of three years would be $40,000. You can assume the lease would qualify as a tax-oriented lease. What is the net advantage to leasing (NAL)? Should the company buy or lease the machine? The loan would have an interest rate of 12%. It would be nonamortizing, with only interest paid at the end of each year for three years, and the principal repaid at the end of Year 3. Lease terms call for payments of $30,000 at the end of each of the next 3 years. ●
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:1. Avro Arrow Co. (AAC) needs a machine with a purchase price of $100,000 for the next 3 years. It can obtain
a bank loan for 100% of the purchase price, or it can lease the machinery. Consider the following information:
Relevant depreciation rates are 30%, 20%, 15%, 15%, 10%, 10% for years 1-6.
Whether buying or leasing, AAC will have to pay maintenance of $5,000 at the end of each year.
AAC's tax rate is 25%.
●
●
The loan would have an interest rate of 12%. It would be nonamortizing, with only interest paid at the end
of each year for three years, and the principal repaid at the end of Year 3.
Lease terms call for payments of $30,000 at the end of each of the next 3 years.
The machine's residual value at the end of three years would be $40,000.
You can assume the lease would qualify as a tax-oriented lease.
What is the net advantage to leasing (NAL)? Should the company buy or lease the machine?
.
●
●
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