A chemical company bought a small vessel for $550,000; it is to be depreciated by 3-year MACRS. When requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $100,000 per year. The lease also provided that the oil company could buy the vessel at the end of 6 years for $350,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 22.98% combined incremental tax rate. Compute its after-tax rate of return on the vessel.

A chemical company bought a small vessel for $550,000; it is to be depreciated by 3-year MACRS. When requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $100,000 per year. The lease also provided that the oil company could buy the vessel at the end of 6 years for $350,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 22.98% combined incremental tax rate. Compute its after-tax rate of return on the vessel.

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

Problem 1PS

See similar textbooks

Similar questions

On January 1, 2021, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2024, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $430,152 and has an expected economic life of five years. Aqua and Maywood expect the residual value at December 31, 2024, to be $66,000. Negotiations led to Maywood guaranteeing a $94,000 residual value. Equal payments under the lease are $132,000 and are due on December 31 of each year with the first payment being made on December 31, 2021. Maywood is aware that Aqua used a 7% interest rate when calculating lease payments. (FV of $1, PV of $1, FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. & 2. Prepare the appropriate entries for Maywood on January 1, 2021 and December 31, 2021, related to the lease. (If no entry is required for a transaction/event, select "No journal entry required" in the…
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,900. Use of the truck will require an increase in NWC (spare parts inventory) of $2,900. The truck will have no effect on revenues, but it is expected to save the firm $20,300 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Year FCF 0 (62,900.00) Answer is complete but not entirely correct. 2 1 20,195.00 $ 21,707.00 $ 3 38,220.00
On January 2, 2018, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of P300,000 starting at the beginning of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a finance lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line amortization for all of its plant assets. Aggregate lease payments were determined to have a present value of P1,800,000, based on implicit interest of10%. In its 2018 income statement, what amount of interest expense should Hernandez report from this lease transaction?
On January 1, 2021, Central Industries leased a high-performance conveyer to Dynamic Company for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Central. The equipment cost Central $1,912,000 and has an expected useful life of five years. Central expects the residual value at December 31, 2025, will be $600,000. Negotiations led to the lessee guaranteeing a $680,000 residual value. Equal payments under the finance/sales-type lease are due on December 31 of each year with the first payment being made on December 31, 2021. Dynamic is aware that Central used a 5% interest rate when calculating lease payments.What is the amount that the lessee will record as Right-of-use-Asset and Lease Liability ?
On January 1, 2016, Cook Textiles leased a building with two acres of land from Peck Development. The lease is for 10 years. No purchase option exists and the property will revert to Peck at the end of the lease. The building and land combined have a fair market value on January 1, 2016, of $1,450,000 and the building has an estimated life of 20 years with a residual value of $150,000. The lease calls for Cook to assume all costs of ownership and to make annual payments of $200,000 due at the beginning of each year. On January 1, 2016, the estimated value of the land was $400,000. Cook uses the straight-line method of depreciation and pays 10% interest on borrowed money. Peck’s implicit rate is unknown. Required: 1. Prepare journal entries for Cook Textiles for 2016. Assume the land could be leased without the building for $59,000 each year. 2. Assuming the land had a fair value on January 1, 2016, of $200,000 and could be leased alone for $30,000, prepare journal entries for Cook…
Crane Co. purchases land and constructs a service station and car wash for a total of $532500. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $590000 and immediately leased from the oil company by Crane. Fair value of the land at time of the sale was $58500. The lease is a 10-year, noncancelable lease. Crane uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Crane at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2021 $590000.00 Dec. 31, 2021 $96019.78 $59000.00 $37019.78 552980.22 Dec. 31, 2022 96019.78 55298.02 40721.76 512258.46 Dec. 31, 2023 96019.78 51225.85 44793.93 467464.53 What is the amount of the…
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,600. Use of the truck will require an increase in NWC (spare parts inventory) of $2,600. The truck will have no effect on revenues, but it is expected to save the firm $20,200 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 21 percent.What will the cash flows for this project be?
Can you help me with this problem with step by step explanation, please?
Cullumber Co. purchases land and constructs a service station and car wash for a total of $487500. At January 2, 2021, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $560000 and immediately leased from the oil company by Cullumber. Fair value of the land at time of the sale was $56000. The lease is a 10-year, noncancelable lease. Cullumber uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Cullumber at termination of the lease. A partial amortization schedule for this lease is as follows: Payments Interest Amortization Balance Jan. 2, 2021 $560000 Dec. 31, 2021 $91137.42 $56000 $35137.42 524862.58 Dec. 31, 2022 91137.42 52486.26 38651.16 486211.42 Dec. 31, 2023 91137.42 48621.14 42516.28 443695.14 What is the…
You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $20,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm’s marginal tax rate is 21 percent.What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
Yokoyama Company owns a machine with a cost of $92,000 and accumulated depreciation of $18,500 that can be sold for $66,000 less a 5% sales commission. Alternatively, Yokoyama Company can lease the machine to another company for 3 years for a total of $74,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Yokoyama Company on the machine would total $10,500 over the 3 years. Prepare a differential analysis on February 21 as to whether Yokoyama Company should lease (Alternative 1) or sell (Alternative 2) the machine. For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Lease Machine (Alt. 1) or Sell Machine (Alt. 2) February 21 Differential Effect Lease Sell Machine Machine (Alternative 2) (Alternative 1) (Alternative 2) Revenues Costs Profit (loss) Should Yokoyama Company lease (Alternative 1) or sell (Alternative 2) the machine?
On January 1, 2018, Sauder Corporation signed a five-year noncancelable lease for equipment. The terms of the lease called for Sauder to make annual payments of $200,000 at the beginning of each year for five years beginning on January 1, 2018 with the title passing to Sauder at the end of this period. The equipment has an estimated useful life of 7 years and no salvage value. Sauder uses the straight-line method of depreciation for all of its fixed assets. The minimum lease payments were determined to have a present value of $833,972 at an effective interest rate of 10%. What type of lease would this be for Sauder?

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS