LTC Inc. is considering whether to sell an existing diecasting mould and then lease it back for 3 years. In this way, cash can be freed up to meet more intermediate needs. The mould brings in revenue of $20,000 yearly with variable cost staking 20% of revenue. The mould was bought 7 years ago for $500,000 with an estimated life of 10 years. It has been depreciated based on the straight-line method. The mould can be sold now for $100,000. Mitti Heavy Equipment Inc. has agreed to buy and then lease back the mould to LTC Inc. at $20,000 yearly for 3 years. The yearly lease payments are to be made in advance, that is, beginning of the lease period. LTC Inc. still enjoys tax holidays granted by the country's economic bureau. Its cost of funds is at 5% (a) Analyse if LTC Inc. should go ahead with the sale-and-lease back plan. (b) LTC Inc. now learns that it can junk the mould as scrap metal for $88,000 payable immediately. Hence, production shall stop as LTC Inc. will relocate to lower cost production centres overseas. Analyse if it should still consider its option in part (a)?
Question 1
LTC Inc. is considering whether to sell an existing diecasting mould and then lease it back for 3 years. In this way, cash can be freed up to meet more intermediate needs. The mould brings in revenue of $20,000 yearly with variable cost staking 20% of revenue. The mould was bought 7 years ago for $500,000 with an estimated life of 10 years. It has been
(a) Analyse if LTC Inc. should go ahead with the sale-and-lease back plan.
(b) LTC Inc. now learns that it can junk the mould as scrap metal for $88,000 payable immediately. Hence, production shall stop as LTC Inc. will relocate to lower cost production centres overseas. Analyse if it should still consider its option in part (a)?
Step by step
Solved in 2 steps with 2 images
