High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $91,000 for five years, due at the beginning of each year. This machine will save Farmer $34,500 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $420,000. This machine will save $37,500 per year in electricity costs. A local bank has offered to finance the machine with a $420,000 loan. The interest rate on the loan will be 8 percent on the remaining balance and will require five annual principal payments of $84,000. Farmer has a target debt-to-asset ratio of 70 percent and a tax rate of 21 percent. After five years, both machine will be worthless. The machines will be depreciated on a straight-line basis. a. What is the NAL of leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much debt is displaced by this lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NAL b. PV S $ 37,517.81 294,000.00
High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $91,000 for five years, due at the beginning of each year. This machine will save Farmer $34,500 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $420,000. This machine will save $37,500 per year in electricity costs. A local bank has offered to finance the machine with a $420,000 loan. The interest rate on the loan will be 8 percent on the remaining balance and will require five annual principal payments of $84,000. Farmer has a target debt-to-asset ratio of 70 percent and a tax rate of 21 percent. After five years, both machine will be worthless. The machines will be depreciated on a straight-line basis. a. What is the NAL of leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much debt is displaced by this lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NAL b. PV S $ 37,517.81 294,000.00
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
Related questions
Question
Transcribed Image Text:High electricity costs have made Farmer Corporation's chicken-plucking machine
economically worthless. Only two machines are available to replace it. The International
Plucking Machine (IPM) model is available only on a lease basis. The lease payments will
be $91,000 for five years, due at the beginning of each year. This machine will save
Farmer $34,500 per year through reductions in electricity costs. As an alternative,
Farmer can purchase a more energy-efficient machine from Basic Machine Corporation
(BMC) for $420,000. This machine will save $37,500 per year in electricity costs. A local
bank has offered to finance the machine with a $420,000 loan. The interest rate on the
loan will be 8 percent on the remaining balance and will require five annual principal
payments of $84,000. Farmer has a target debt-to-asset ratio of 70 percent and a tax
rate of 21 percent. After five years, both machine will be worthless. The machines will.
be depreciated on a straight-line basis.
a. What is the NAL of leasing? (Do not round intermediate calculations and round your
answer to 2 decimal places, e.g., 32.16.)
b. How much debt is displaced by this lease? (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
a. NAL
b. PV
$
$
37,517.81
294,000.00
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