Jeff & Bezos is a fresh groceries delivery company. The company has access to borrowing funds at a pre-tax rate of 7 % per year. Jeff & Bezos pays income taxes using 21 % tax rate. The company would like to start using high-speed low-altitude drones to deliver grocery purchases directly to residential customers' backyards. Doing so would bring the company pre-tax savings in the amount of $3.1 million each year. The required fleet of drones costs $8.2 million. If the company chooses to buy them, the drones would be losing their economic value following the straight-line depreciation method during a five year period. The fleet of drones, due to their heavy usage, would have no salvage value at the end. Instead of buying the fleet of the drones, Jeff & Bezos is also contemplating leasing the drones for a lease term that matches the drones' economic life. It would lease them from a different company, Nets & Flicks, that currently owns the required number of the drones. The estimated annual pre-tax cost of leasing would be $1,760,000. Nets & Flicks requires that the lease payments are made by Jeff & Bezos at the beginning of each year. One additional requirement is that Jeff & Bezos pays a $840,000 security deposit when the lease agreement is being signed, and at the end of the lease term Nets & Flicks promises to give the deposit back to Jeff & Bezos. When the security deposit is also taken into account, Jeff & Bezos' net advantage to leasing, or NAL, equals (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.) NAL
Jeff & Bezos is a fresh groceries delivery company. The company has access to borrowing funds at a pre-tax rate of 7 % per year. Jeff & Bezos pays income taxes using 21 % tax rate. The company would like to start using high-speed low-altitude drones to deliver grocery purchases directly to residential customers' backyards. Doing so would bring the company pre-tax savings in the amount of $3.1 million each year. The required fleet of drones costs $8.2 million. If the company chooses to buy them, the drones would be losing their economic value following the straight-line depreciation method during a five year period. The fleet of drones, due to their heavy usage, would have no salvage value at the end. Instead of buying the fleet of the drones, Jeff & Bezos is also contemplating leasing the drones for a lease term that matches the drones' economic life. It would lease them from a different company, Nets & Flicks, that currently owns the required number of the drones. The estimated annual pre-tax cost of leasing would be $1,760,000. Nets & Flicks requires that the lease payments are made by Jeff & Bezos at the beginning of each year. One additional requirement is that Jeff & Bezos pays a $840,000 security deposit when the lease agreement is being signed, and at the end of the lease term Nets & Flicks promises to give the deposit back to Jeff & Bezos. When the security deposit is also taken into account, Jeff & Bezos' net advantage to leasing, or NAL, equals (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.) NAL
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:Jeff & Bezos is a fresh groceries delivery company. The company has access to
borrowing funds at a pre-tax rate of 7% per year. Jeff & Bezos pays income taxes using
21 % tax rate. The company would like to start using high-speed low-altitude drones to
deliver grocery purchases directly to residential customers' backyards. Doing so would
bring the company pre-tax savings in the amount of $3.1 million each year.
The required fleet of drones costs $8.2 million. If the company chooses to buy them, the
drones would be losing their economic value following the straight-line depreciation
method during a five year period. The fleet of drones, due to their heavy usage, would
have no salvage value at the end.
Instead of buying the fleet of the drones, Jeff & Bezos is also contemplating leasing the
drones for a lease term that matches the drones' economic life. It would lease them from
a different company, Nets & Flicks, that currently owns the required number of the
drones. The estimated annual pre-tax cost of leasing would be $1,760,000. Nets & Flicks
requires that the lease payments are made by Jeff & Bezos at the beginning of
each year. One additional requirement is that Jeff & Bezos pays a $840,000 security
deposit when the lease agreement is being signed, and at the end of the lease term
Nets & Flicks promises to give the deposit back to Jeff & Bezos.
When the security deposit is also taken into account, Jeff & Bezos' net advantage to
leasing, or NAL, equals
(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.)
NAL
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