IN 6020 Problem: Lease vs. Buy Roberts Fabrication and Automation, Inc. (RFA) v19f oberts Fabrication and Automation, Inc. (RFA) just completed its Capital Budgeting analysis for a new netallic 3D printing machine that will aid in the design and production of new "classic" and custom utomotive components. The NPV is positive and significant, the IRR is well above the 12% project urdle rate (required return), and RFA has decided to move forward with the project. he next part of their analysis involves the financing of the machine, that is, whether to purchase, or to ease the machine.
IN 6020 Problem: Lease vs. Buy Roberts Fabrication and Automation, Inc. (RFA) v19f oberts Fabrication and Automation, Inc. (RFA) just completed its Capital Budgeting analysis for a new netallic 3D printing machine that will aid in the design and production of new "classic" and custom utomotive components. The NPV is positive and significant, the IRR is well above the 12% project urdle rate (required return), and RFA has decided to move forward with the project. he next part of their analysis involves the financing of the machine, that is, whether to purchase, or to ease the machine.
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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Transcribed Image Text:FIN 6020
Problem: Lease vs. Buy
v19f
Roberts Fabrication and Automation, Inc. (RFA)
Roberts Fabrication and Automation, Inc. (RFA) just completed its Capital Budgeting analysis for a new
metallic 3D printing machine that will aid in the design and production of new "classic" and custom
automotive components. The NPV is positive and significant, the IRR is well above the 12% project
hurdle rate (required return), and RFA has decided to move forward with the project.
The next part of their analysis involves the financing of the machine, that is, whether to purchase, or to
lease the machine.
If the printer is purchased:
The initial investment (printer cost, shipping, & installation) is $347,500. RFA expects to borrow
this amount from the 4th Tennessee Bank of the Southeast with a term of 4 years and an interest
rate of 7.25%. The loan would be fully amortized and call for annual payments at the end of
each year. Maintenance costs are predicted to be $20,000 per year. Base on Internal Revenue
Service guidelines, the printer will be depreciated using MACRS (half-year convention) and a 5
year class-life. RFA's tax rate is 31%
The Leasing option:
The printer will be made by Custom Tools of Middle Tennessee. It has offered to lease the printer to
RFA as an alternative to the purchase option. Their proposed lease terms are:
Lease payments of $89,250 per year beginning on the installation of the printer with a total
of 5 payments. (This means payments at t = 0, 1, 2, 3, and 4).
The Lease payments above include all maintenance.
RFA expects to operate this project for 4 years (and no more), regardless of whether is purchases or
leases the printer. The printer is expected to have a market value of $42,500 ("salvage value") at the end
of the 4 year project. Consider this to be a guideline lease for IRS purposes.
Using a blank worksheet (or page of paper) conduct the Lease vs Buy analysis.
a. Using Custom Tools' proposed lease terms, what is the NAL, and should the 3d printer be leased or
purchased?
b. Using your first analysis (part a.), at what lease payment would the firm be indifferent to either
leasing or buying? That is, what annual lease payment results in a NAL=0?
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