QUESTION 4CBC Ltd. wishes to acquire a K100,000 brick making machine which has auseful life of eight years. At the end of this time, the machine's scrap valuewill be K8,000. The asset will be depreciated using the straight line methodover its eight-year life. The company can use either lease or debt financing.Lease payment of K16,000 at the beginning of each of the eight years wouldbe required. If debt financed, the interest rate would be 14 percent anddebt payments would be due at the beginning of each of the eight years.(Interest would be amortized as a mortgage-type of debt instrument.) Thecompany is in the 40 percent tax bracket. Which method of financing hasthe lower present value of cash outflows?

The question is based on the concept of capital budgeting techniques to select the most appropriate…

Answered: CBC Ltd. wishes to acquire a K100,000…

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

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XYZ Builders Ltd. need to acquire the use of a crane for their construction business and are considering buying or leasing a crane. The crane costs Rs.1000 subject to SLM depreciation with salvage value 0 at the end of 5 years. In contrast, the lease rent is Rs.3000 p.a. to be paid in advance each year for 5 years.XYZ Builders ltd can raise debt at 20% payable in equal annual instalments, each instalment due at the beginning of the year. Tax applicable in 35%. Should it lease or buy the asset?
Sigma Tools will lease a computerized stamping machine from StarBanc. The machine costs $500,000 and will be depreciated on a straight-line basis to a zero book value over the next 5 years, which is also the term of the lease. The expected salvage value in 5 years is $25,000. StarBanc's marginal tax rate is 30% and it requires an after-tax rate of return of 12% on investments of this type. What annual, end-of-the-year, pretax lease payment must StarBanc receive to earn the required 12% return?
You need a particular piece of equipment for your production process. An equipment - leasing company has offered to lease the equipment to you for $9 comma 700 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed here: LOADING... (the equipment has an economic life of 5 years). If your discount rate is 7.2 %, what should you do? \table[[Year 0, Year 1, Year 2, Year 3, Year 4, Year 5], [-$40, 200, $2,100, -$2,100,- $2,100, - $2,100, - $2,100 c Year 0 - $40,200 Year 1 - $2,100 Year 2 - $2,100 Year 3 Year 4 Year 5 - $2,100 - $2,100 - $2,100

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