Imagine yourself in the position of Thomas Pierce , president of Greymare Bus Lines. Your firm was established by your grandfather who was quick to capitalize on the growing demand for transportation between Widdicombe and nearby townships. The company has owned all its vehicles from the time the company was formed you are now reconsidering that policy. Your operating manager wants to buy a new bus costing $100,000. The bus will last only eight years before going to the scrap yard. You are convinced that investment in the additional equipment is worthwhile. However, the representative of the bus manufacturer has pointed out that her firm would also be willing to lease the bus to you for eight annual payments of $16.200 each. Greymare would remain responsible for all maintenance, insurance, and operating expenses. If Greymare does not own the bus it cannot depreciate it and therefore, it gives up a valuable depreciation tax shield. We assume depreciation would be calculated immediately Greymare's borrowing rate is 10%. Assume this is a financial lease. a. What is the value of the lease if Greymare's marginal tax rate is 1, 6.307 (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in thousands rounded to 2 decimal places)
Imagine yourself in the position of Thomas Pierce , president of Greymare Bus Lines. Your firm was established by your grandfather who was quick to capitalize on the growing demand for transportation between Widdicombe and nearby townships. The company has owned all its vehicles from the time the company was formed you are now reconsidering that policy. Your operating manager wants to buy a new bus costing $100,000. The bus will last only eight years before going to the scrap yard. You are convinced that investment in the additional equipment is worthwhile. However, the representative of the bus manufacturer has pointed out that her firm would also be willing to lease the bus to you for eight annual payments of $16.200 each. Greymare would remain responsible for all maintenance, insurance, and operating expenses. If Greymare does not own the bus it cannot depreciate it and therefore, it gives up a valuable depreciation tax shield. We assume depreciation would be calculated immediately Greymare's borrowing rate is 10%. Assume this is a financial lease. a. What is the value of the lease if Greymare's marginal tax rate is 1, 6.307 (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in thousands rounded to 2 decimal places)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:reases
Imagine yourself in the position of Thomas Pierce . president of Greymare Bus Lines. Your firm was established by your grandfather,
who was quick to capitalize on the growing demand for transportation between Widdicombe and nearby townships. The company has
owned all its vehicles from the time the company was formed: you are now reconsidering that policy. Your operating manager wants to
buy a new bus costing $100,000. The bus will last only eight years before going to the scrap yard. You are convinced that investment
In the additional equipment is worthwhile. However, the representative of the bus manufacturer has pointed out that her firm would
also be willing to lease the bus to you for eight annual payments of $16,200 each. Greymare would remain responsible for all
maintenance, Insurance, and operating expenses. If Greymare does not own the bus it cannot depreciate it and therefore, it gives up a
valuable depreciation tax shield. We assume depreciation would be calculated immediately. Greymare's borrowing rate is 10% Assume
this is a financial lease.
a. What is the value of the lease if Greymare's marginal tax rate is re- 0.307 (A negative answer should be indicated by a minus
sign. Do not round intermediate calculations. Enter your answer in thousands rounded to 2 decimal places.)
Valus of the lease
thousands
b. What would the lease value be if the
amounts over years 1 through 57 (Do not round intermediate calculations. Enter your answer in thousands rounded to 2 decimal
places)
rate is 21%, but for tax purposes, the initial investment had to be written off in equal
lvalue of the lease
thousands
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