Lease versus Buy Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply: . The machinery falls into the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. The firm's tax rate is 25%. The loan would have an interest rate of 10%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4. i. The lease terms call for $400,000 payments at the end of each of the next 4 years. Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $200,000 at the end of the 4th year.

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
icon
Related questions
Question
Lease versus Buy
Big Sky Mining Company must install
$1.5 million of new machinery in its
Nevada mine. It can obtain a bank loan
for 100% of the purchase price, or it can
lease the machinery. Assume that the
following facts apply:
The machinery falls into the MACRS
3-year class. (The depreciation rates
for Year 1 through Year 4 are equal to
0.3333, 0.4445, 0.1481, and
0.0741.)
Under either the lease or the
purchase, Big Sky must pay for
insurance, property taxes, and
maintenance.
The firm's tax rate is 25%.
The loan would have an interest rate
of 10%. It would be nonamortizing,
with only interest paid at the end of
each year for four years and the
principal repaid at Year 4.
i. The lease terms call for $400,000
payments at the end of each of the
next 4 years.
Big Sky Mining has no use for the
machine beyond the expiration of the
lease, and the machine has an
estimated residual value of $200,000
at the end of the 4th year.
Transcribed Image Text:Lease versus Buy Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply: The machinery falls into the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. The firm's tax rate is 25%. The loan would have an interest rate of 10%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4. i. The lease terms call for $400,000 payments at the end of each of the next 4 years. Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $200,000 at the end of the 4th year.
I
What is the cost of owning? Enter
your answer as a positive value. Do
not round intermediate calculations.
Write out your answer completely. For
example, 5 million should be entered
as 5,000,000. Round your answer to
the nearest dollar.
$
What is the cost of leasing? Enter
your answer as a positive value. Do
not round intermediate calculations.
Write out your answer completely. For
example, 5 million should be entered
as 5,000,000. Round your answer to
the nearest dollar.
$
What is the NAL of the lease? Do not
round intermediate calculations. Write
out your answer completely. For
example, 5 million should be entered
as 5,000,000. Round your answer to
the nearest dollar.
$
Transcribed Image Text:I What is the cost of owning? Enter your answer as a positive value. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar. $ What is the cost of leasing? Enter your answer as a positive value. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar. $ What is the NAL of the lease? Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar. $
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 8 steps

Blurred answer
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
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…
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