Comey Products has decided to acquire some new equipment having a $240,000 purchase price. Theequipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 throughYear 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the costof borrowing that it should use when comparing purchasing to leasing and has hired you to answer thisquestion. What is the correct answer to Comey's question? (Hint: Use the shortcut method to find theafter-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to thenearest dollar.

Answered: Image /qna-images/answer/f5b605f1-ef4a-46de-9cb7-cda6a2556c2a.jpg

Answered: Comey Products has decided to acquire…

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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Mr. XYZ is an entrepreneur who is contemplating to buy a machine to increase the capacity of his manufacturing operations, He consults you for advise on the alternatives of leasing or buying the equipment. If purchased, the straight line depreciation expense will be P 18,700 annually over its life of 5 years. The annual lease payments will amount to P 29,000 payable at the beginning of each of the 5 years. Cost of money is 18%. Tax rate is 35%. There is no salvage value. Present value of P 1 received annually for 5 years at 18% is 3,127. Present value of P1 due in 5 years at 18% is .437. The amount of annual lease payment wherein Mr. XYZ will be indifferent between buying and leasing the machine is?
Yummy Food is expanding its business and wants to open a new facility to make frozen lasagna, which requires a new automated lasagna maker. A lasagna maker can be purchased for $350,000 or leased under a finance lease over 7 years, with lease payments to be made at the beginning of each year. If the company purchases the lasagna maker, it can be fully depreciated to zero using the straight-line method over seven years. The management expects the scrap/residual value of the lasagna maker to be $60,000 at the end of the lease. After a detailed analysis of the project, Yummy Food determines the appropriate after-tax cost of capital of the project to be 15% per annum. Yummy Food pays a corporate tax rate of 28% and it can borrow funds at a before-tax interest rate of 5% per annum. All cash-flows have been quoted on a before-tax basis. Given this information, what is the lease payment (per annum) that would make Yummy Food indifferent between leasing and borrow-to-buy the machine? (Using…
Cost of Borrowing Comey Products has decided to acquire some new equipment having a $180,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 7% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar. $
An investor is setting up a fund which requires 18 years of contributions. The investor pays £200 per month for 15 years. After 15 years, the payments increase by £10 for the subsequent 3 years. All payments are made in arrears, i.e at the end of the period. The effective annual rate i = 2%. What is the value of the fund after 18 years? £ 数字 Enter an answer correct to 2 decimal places.
A construction company is considering the proposed acquisition of a newearthmover. The purchase price is $100,000, and an additional $25,000 is required to modify the equipment for special use by the company. The equipment falls into the MACRS five-year classification (tax life). and it will be sold after five year. (project life) for $50,000. Purchase of the earthmover will have no effect on revenues. but it is expected 10 save the firm $60,000 per year in before-tax operating costs-mainly labor.The firm's marginal tax rate is 40%. Assume that the initial investment is to be financed. by a bank loan at an intrest rate of 10% payable annually. Determine that after-tax cash flow and the worth of investment for this project if the firm's MARR is known to be 12°o.
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XYZ Inc. desires to evaluate two plans for acquiring equipment: borrowing to purchase and leasing. Thefirm is in the 40% tax bracket and it’s after tax cost of debt is 7.8%. The equipment costs $32,000 and willhave a 5-year life. It will be depreciated under MACRS using a 5-year recovery period. The total purchaseprice will be financed by a 5-year, 13% loan requiring equal annual end-of-year payments of $9,098. Thefirm will pay $2,350 per year for a service contract that covers all maintenance costs; insurance and othercosts will be borne by the firm. The firm plans to keep the equipment and use it beyond its 5-year recoveryperiod. Alternatively, the firm can lease the equipment under a 5-year lease requiring annual end-of yearpayments of $7,750. All maintenance costs will be paid by the lessor, and insurance and other costs will beborne by the lessee. The lessee will exercise its option to purchase the asset for $2,200 at termination of thelease. For the purchasing plan, calculate the…
Wolfson Corporation has decided to purchase a new machine that costs $3.6 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 24 percent. The Sur Bank has offered Wolfson a four-year loan for $3.6 million. The repayment schedule is four yearly principal repayments of $900,000 and an interest charge of 7 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1,020,000 per year are due at the beginning of each of the four years of the lease. a. What is the NAL of leasing for Wolfson? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the maximum annual lease…
A firm is considering leasing or buying a mower. The mower costs $1000 and can be depreciated and falls into the MACRS 3 year class (33%; 45%; 15% and 7%). A maintenance contract will be purchased for $200 per year payable at the start of each year for 4 years. The firms tax rate is 30%. The firm expects to sell the mower for $96 at the end of the 3rd year. What is the net sale price when the mower is sold?
Hanchets Inc. is considering the purchase of a new vehicle for P350,000. The firm's old vehicle has a book value of P85,000, but can only be sold for P60,000. The new vehicle will be depreciated using a 5-year useful life and the straight-line method. It is expected to save P62,000 after taxes from the reduced fuel and maintenance expenses. Tabletop Ranch is in the 34% tax bracket and has a 12% cost of capital. Compute for the accounting rate of return on initial investment.

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