### Buy vs. Lease Analysis in Business Expansion#### Case Study: Decision-Making for Acquiring a Next-Door Manufacturing Facility**Scenario:**Your company is planning to expand by taking over the next-door manufacturing facility. You are faced with a buy-versus-lease option. Here are the financial details:- **Purchase Price:** $1.5 million- **Lease Cost:** $270,000 per year for 10 years- **Resale Value (if purchased):** 40% of original purchase price after 10 years- **Annual Income:** $1.2 million- **Annual Operating Cost:** $300,000- **Combined Income Tax Rate:** 38%- **After-Tax Minimum Attractive Rate of Return (MARR):** 10%**Assumptions:**- Lease payments are due at the end of each year.- Straight-line depreciation is used over the 10-year life with full first-year depreciation.#### Objectives:1. **Determine EUAW (Equivalent Uniform Annual Worth)** for each option with a MARR of 10%.2. **Assess Break-even Rate of Return (ROR)** for purchasing versus leasing.#### Steps:1. **Equivalent Uniform Annual Worth (EUAW):** - EUAW calculation involves converting a series of cash flows (from purchase and lease options) into a uniform annual series of cash flows. - Formula: $ EUAW = EUAB - EUAC $ - where EUAB is the Equivalent Uniform Annual Benefit, and EUAC is the Equivalent Uniform Annual Cost.2. **Break-even Rate of Return (ROR):** - This is the rate at which the present worth of costs is equivalent for both purchase and lease options. - Formula: $(EUAB - EUAC)_{\text{purchase}} = (EUAB - EUAC)_{\text{lease}}$#### Analysis:(a) **Calculating EUAW for Each Option:** - **Purchase Option:** - Consider depreciation, tax savings, operating costs, annual income, resale value, and MARR. - **Lease Option:** - Consider annual lease payments, tax savings, operating costs, annual income, and MARR.(b) **Determining the Break-even ROR:** - Find the ROR that makes the net present worth of costs equal for both options.This analysis will allow you to make an informed decision on

EUAW or Estimated Uniform Annual Worth is nothing but NPV distributed equally over the life of the…

e at the end of its 10 years life. In either case the annual income 1.2 million and the annual operating cost would be $300,000. Y % combined income tax and the after-tax minimum attractive ra 10%. Assuming lease payments are due at the end of the year e depreciation over the 10 years life with full first year deprecia | = EUAB-EUAC for each option with MARR = 10%. facility be purchased or leased? even rate of return of purchase versus lease, i.e. ROR at which UAC) purchase = (EUAB – EUAC) lease -

e at the end of its 10 years life. In either case the annual income 1.2 million and the annual operating cost would be $300,000. Y % combined income tax and the after-tax minimum attractive ra 10%. Assuming lease payments are due at the end of the year e depreciation over the 10 years life with full first year deprecia | = EUAB-EUAC for each option with MARR = 10%. facility be purchased or leased? even rate of return of purchase versus lease, i.e. ROR at which UAC) purchase = (EUAB – EUAC) lease -

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: eer. The annual depreciation will be $14,250 and the tax rate is 24 percent. What is the operating…

A: Cash flow in economics is the financial vitality for a business, representing the continuous…

Q: Marco has an asset valued $100 now. There is a 20% depreciation rate. Landing the asset is possible,…

A: Correct: By doing nothing, Marco can consume $68 now and $80 later. However, the statement about…

Q: 4. An asset was acquired by Hugo and Sons with the following values: First cost= $400,000,…

A: * SOLUTION :- (10) Given that ,

Q: 4. A firm purchased $120,000 worth of light general- purpose trucks. The operations of the trucks…

Q: A construction equipment costs P180,000. It has a salvage value of P15,000 at the end of its life of…

A: given that, fixed cost: P180000 salvage value: P15000 life of 12years

Q: Years 1 2 3 4 5 6 n Defender -3200 -2,500 -2,650 -3,300 1. $17,200 Annual Cost -Annual Tax for…

A: Annual Equivalent Cost is a quantitative measurement used to evaluate the cost of an investment or…

Q: 3. A machine is purchased for $70,000. Life is 10 years with a S10,000 salvage. MARR is 10 and the…

A: here we calculate the annual equivalent revenue requirement for this machine by using the MARR and…

Q: Winthrop Company has an opportunity to manufacture and sell a new product for a five-year period. To…

A: NET PRESENT VALUE Net present value (NPV) is a financial measure that calculates the difference…

Q: Your company is currently considering an acceleration program to enhance the timing of production…

A: The present value defines the current worth of a future sum of money, discounted at a specific rate…

Q: N1 New equipment costing $35,000 has a 5 -year life and no salvage value. Benefits are expected…

A: New Equipment = 35,000 Salvage Value = 0 n = 5 years Benefits = 9000 Combined marginal Income tax =…

Q: The market value of a presently owned machine lin a wind turbine manufacturing plant is $130,000. It…

A: * SOLUTION :- (2) Given that , The market value is = $130000. Annual operating cost is = $63000.…

Q: Problem 17.049: Calculate the after-tax AW of two alternatives A European candy manufacturing plant…

A: * SOLUTION :- Given that ,

Q: op an ATCF for problem 3, if 50% of the initial investment is borrowed a nual interest rate of 5% to…

A: *Answer: *4

Q: Solve all this question......you will not solve all questions then I will give you down?? upvote...

A: The objective of this question is to determine the projected after-tax rate of return for a…

Q: Certain new machinery when placed in service is estimated to cost $180,000. It is expected to reduce…

A: The objective of the question is to calculate the After-Tax Cash Flow (ATCF), Before-Tax Cash Flow…

Q: Two fixtures are being considered for a particular job in a manufactunng firm The pertinent data for…

A: Annual worth or AW is referred to as the easy way of understanding the annual amount, for instance,…

Q: Switch 10 Light Mode Depreciation is not a cash flow. (True or False) Uncle Mort's company is…

A: To determine the number of units that must be sold annually to achieve break-even, we need to…

Question

### Buy vs. Lease Analysis in Business Expansion

#### Case Study: Decision-Making for Acquiring a Next-Door Manufacturing Facility

**Scenario:**
Your company is planning to expand by taking over the next-door manufacturing facility. You are faced with a buy-versus-lease option. Here are the financial details:

- **Purchase Price:** $1.5 million
- **Lease Cost:** $270,000 per year for 10 years
- **Resale Value (if purchased):** 40% of original purchase price after 10 years
- **Annual Income:** $1.2 million
- **Annual Operating Cost:** $300,000
- **Combined Income Tax Rate:** 38%
- **After-Tax Minimum Attractive Rate of Return (MARR):** 10%

**Assumptions:**
- Lease payments are due at the end of each year.
- Straight-line depreciation is used over the 10-year life with full first-year depreciation.

#### Objectives:

1. **Determine EUAW (Equivalent Uniform Annual Worth)** for each option with a MARR of 10%.
2. **Assess Break-even Rate of Return (ROR)** for purchasing versus leasing.

#### Steps:

1. **Equivalent Uniform Annual Worth (EUAW):**
- EUAW calculation involves converting a series of cash flows (from purchase and lease options) into a uniform annual series of cash flows.
- Formula: $ EUAW = EUAB - EUAC $
- where EUAB is the Equivalent Uniform Annual Benefit, and EUAC is the Equivalent Uniform Annual Cost.

2. **Break-even Rate of Return (ROR):**
- This is the rate at which the present worth of costs is equivalent for both purchase and lease options.
- Formula: $(EUAB - EUAC)_{\text{purchase}} = (EUAB - EUAC)_{\text{lease}}$

#### Analysis:

(a) **Calculating EUAW for Each Option:**

- **Purchase Option:**
- Consider depreciation, tax savings, operating costs, annual income, resale value, and MARR.

- **Lease Option:**
- Consider annual lease payments, tax savings, operating costs, annual income, and MARR.

(b) **Determining the Break-even ROR:**

- Find the ROR that makes the net present worth of costs equal for both options.

This analysis will allow you to make an informed decision on

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: a. The EUAW = EUAB-EUAC for each option with MARR = €10%. Should the facility be purchased or lea

VIEW

Step 2: The break-even rate of return of purchase versus lease, i.e. ROR at which (EUAB - EUAC) purchase = (

VIEW

Solution

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Calculate the payback period
Mansukh
Give typing answer with explanation and conclusion
2- The marginal cost for year t is computed as SV, - SV-1+SV¢ • i+ Cost, where SV denotes salvage value. a) TRUE b) FALSE 3- Replacement rule implies replacing the existing asset when the marginal cost of the existing asset is more than the marginal cost of the new asset. a) TRUE b) FALSE 4- Depreciation recapture occurs when the market value of an asset is greater than the book value. a) TRUE b) FALSE 5- Year 1 SV O&M 15,000 1000 12,000 1500 9.000 2 3 2000 The table above lists salve value (SV) and operating and mainteriance (O&M) cost of an asset through 3 years with the initial cost of $20,000. Given MARR is 10%, which of the statements is correct (choose the closest answer)? a) The marginal cost at year 2 is $6,000 and the annual cost (EUAC) through year two is $6,500 b) The marginal cost at year 2 is $6,000 and the annual cost (EUAC) through year two is $7,048 c) The marginal cost at year 2 is $6,500 and the annual cost (EUAC) through year two is $7,048 d) The marginal cost at…
First cost of equipment = $200,000 Market value at the end of year 6 = $10,000 MACRS depreciation is used. The equipment is a 5-year property. Incremental income-tax rate for the company = 35% Year 0 1 2 3 4 5 6 BT-CF in $ -200K 60K 63K 66K 69K 72K 75K Market value = 10K The first-year after tax-cash flow is equal to _____________.
Two alternative machines will produce the same product, but one is capable of higher-quality work, which can be expected to return greater revenue. The following are relevant data. Determine which is the better alternative, assuming repeatability and using SL depreciation, an income-tax rate of 30%, and an after-tax MARR of 10%. Calculate the AW value for the Machine A. Capital investment Life Terminal BV (and MV) Annual receipts Annual expenses Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year. AWA (10%) = $ (Round to the nearest dollar.) Machine A $22,000 11 years $5,000 $152,000 $141,000 (...) Machine B $32,000 8 years $500 $190,000 $173,000
urgent A firm can purchase a centrifugal separator (5-year MACRS property) for $17,000. The estimated salvage value is $4,000 after a useful life of six years. Operating and maintenance (O&M) costs for the first year are expected to be$1,700. These O&M costs are projected to increase by $500 per year each year thereafter. The income tax rate is 25% and the MARR is 13% after taxes. What must the uniform annual benefits be for the purchase of the centrifugal separator to be economical on an after-tax basis? The uniform annual benefits should be........... (Round to the nearest dollar.)