Jeff & Bezos is a fresh groceries delivery company. They have access to borrowing funds at a pre-tax rate of 6% 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. Jeff & Bezos is 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 own the required number of the drones. Instead of leasing the fleet of the drones, Jeff & Bezos is also contemplating buying them, which would cost the company $4,500,000. If the company chooses to buy them, the drones would be losing their economic value following the straight-line depreciation method during a three year period. The fleet of drones, due to their heavy usage, would have no salvage value in three years. Calculate the pre-tax lease payment that would make both Jeff & Bezos and Nets & Flicks indifferent between entering the lease agreement and walking away from it. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Your answer should be typed as a positive value.) Break-even lease payment
Jeff & Bezos is a fresh groceries delivery company. They have access to borrowing funds at a pre-tax rate of 6% 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. Jeff & Bezos is 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 own the required number of the drones. Instead of leasing the fleet of the drones, Jeff & Bezos is also contemplating buying them, which would cost the company $4,500,000. If the company chooses to buy them, the drones would be losing their economic value following the straight-line depreciation method during a three year period. The fleet of drones, due to their heavy usage, would have no salvage value in three years. Calculate the pre-tax lease payment that would make both Jeff & Bezos and Nets & Flicks indifferent between entering the lease agreement and walking away from it. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Your answer should be typed as a positive value.) Break-even lease payment
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:Jeff & Bezos is a fresh groceries delivery company. They have access to borrowing
funds at a pre-tax rate of 6 % 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. Jeff & Bezos
is 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 own the
required number of the drones. Instead of leasing the fleet of the drones, Jeff & Bezos is
also contemplating buying them, which would cost the company $4,500,000. If the
company chooses to buy them, the drones would be losing their economic value
following the straight-line depreciation method during a three year period. The fleet of
drones, due to their heavy usage, would have no salvage value in three years.
Calculate the pre-tax lease payment that would make both Jeff & Bezos and Nets &
Flicks indifferent between entering the lease agreement and walking away from it. (Do
not round intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16. Your answer should be typed as a positive value.)
Break-even lease payment
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education