King Corporation Limited (KCL), a producer of electricity, is considering expanding its operation by adding 5 generators. The cost of these generators would be Tk. 100 million. The expected life of the generators is 5 years. The addition of these generators will result in cash inflows of Tk. 50 million per year for 5 years. Cash outflows would be 50% of cash inflows. KCL uses a straight line method of depreciation and expects no salvage value from the generators at the end of their service lives. IDLC, a leading Non-Bank Financial Institution, offered KCL to lease the generators for 5 years. The lease payments to be made at the beginning of each year would be Tk. 24 million. The annualized risk-free rate of return is 7%. Tax rate for both KCL and IDLC is 30%. a. b. Show the cash flows associated with the generators to KCL if it decides to buy them. Show the cash flows associated with the generators to KCL if it decides to take a lease on them from IDLC. C. Show the incremental cash flows for lease versus buy to KCL of the generators. Calculate the NPV from the incremental cash flows. If you are the analyst, would you d. recommend KCL to take a lease on the generators from IDLC or buy them? Find out the NPV of the lease of the generators to IDLC. Show the calculation. Assume now that KCL's tax rate is 10% while IDLC's tax rate remained at 30% and e. f. IDLC revises its offer to reduce the lease payments to Tk. 22 million a year. (i) (ii) payments that KCL can accept. Now find out the NPV to KCL and to IDLC of the lease. Find out the minimum lease payments that IDLC can accept and maximum lease
King Corporation Limited (KCL), a producer of electricity, is considering expanding its operation by adding 5 generators. The cost of these generators would be Tk. 100 million. The expected life of the generators is 5 years. The addition of these generators will result in cash inflows of Tk. 50 million per year for 5 years. Cash outflows would be 50% of cash inflows. KCL uses a straight line method of depreciation and expects no salvage value from the generators at the end of their service lives. IDLC, a leading Non-Bank Financial Institution, offered KCL to lease the generators for 5 years. The lease payments to be made at the beginning of each year would be Tk. 24 million. The annualized risk-free rate of return is 7%. Tax rate for both KCL and IDLC is 30%. a. b. Show the cash flows associated with the generators to KCL if it decides to buy them. Show the cash flows associated with the generators to KCL if it decides to take a lease on them from IDLC. C. Show the incremental cash flows for lease versus buy to KCL of the generators. Calculate the NPV from the incremental cash flows. If you are the analyst, would you d. recommend KCL to take a lease on the generators from IDLC or buy them? Find out the NPV of the lease of the generators to IDLC. Show the calculation. Assume now that KCL's tax rate is 10% while IDLC's tax rate remained at 30% and e. f. IDLC revises its offer to reduce the lease payments to Tk. 22 million a year. (i) (ii) payments that KCL can accept. Now find out the NPV to KCL and to IDLC of the lease. Find out the minimum lease payments that IDLC can accept and maximum lease
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
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Transcribed Image Text:King Corporation Limited (KCL), a producer of electricity, is considering expanding its
operation by adding 5 generators. The cost of these generators would be Tk. 100 million.
The expected life of the generators is 5 years. The addition of these generators will result in
cash inflows of Tk. 50 million per year for 5 years. Cash outflows would be 50% of cash
inflows. KCL uses a straight line method of depreciation and expects no salvage value from
the generators at the end of their service lives. IDLC, a leading Non-Bank Financial
Institution, offered KCL to lease the generators for 5 years. The lease payments to be made
at the beginning of each year would be Tk. 24 million. The annualized risk-free rate of return
is 7%. Tax rate for both KCL and IDLC is 30%.
Show the cash flows associated with the generators to KCL if it decides to buy them.
Show the cash flows associated with the generators to KCL if it decides to take a
a.
b.
lease on them from IDLC.
Show the incremental cash flows for lease versus buy to KCL of the generators.
Calculate the NPV from the incremental cash flows. If you are the analyst, would you
C.
d.
recommend KCL to take a lease on the generators from IDLC or buy them?
Find out the NPV of the lease of the generators to IDLC. Show the calculation.
Assume now that KCL's tax rate is 10% while IDLC's tax rate remained at 30% and
е.
f.
IDLC revises its offer to reduce the lease payments to Tk. 22 million a year.
(i)
(ii)
payments that KCL can accept.
Now find out the NPV to KCL and to IDLC of the lease.
Find out the minimum lease payments that IDLC can accept and maximum lease
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