Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $48,000. It can borrow funds for four years at 11 percent interest. The asset will qualify for a 25 percent CCA. Assume a tax rate of 35 percent. The other alternative is to sign two operating leases, one with payments of $15,000 for the first two years and the other with payments of $18,500 for the last two years. The leases would be treated as operating leases. a. Compute the aftertax cost of the lease for the four years. (Negative answers should be indicated by a minus sign. Round the final answers to nearest whole doller.) Year Aftertax cost 0 1 5 15000 9750 13250 12025 6475 b. Compute the annual payment for the loan. Use Appendix D. (Round the final answer to nearest whole dollar) Annual payment 15474 c. Compute the amortization schedule for the loan. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.) Year Beginning Balance Annual Payments Annual Interest Repayment on Principal Ending Balance
Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $48,000. It can borrow funds for four years at 11 percent interest. The asset will qualify for a 25 percent CCA. Assume a tax rate of 35 percent. The other alternative is to sign two operating leases, one with payments of $15,000 for the first two years and the other with payments of $18,500 for the last two years. The leases would be treated as operating leases. a. Compute the aftertax cost of the lease for the four years. (Negative answers should be indicated by a minus sign. Round the final answers to nearest whole doller.) Year Aftertax cost 0 1 5 15000 9750 13250 12025 6475 b. Compute the annual payment for the loan. Use Appendix D. (Round the final answer to nearest whole dollar) Annual payment 15474 c. Compute the amortization schedule for the loan. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.) Year Beginning Balance Annual Payments Annual Interest Repayment on Principal Ending Balance
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
29. Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The asset will qualify for a 25 percent CCA. Assume a tax rate of 35 percent. The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar. The leases would be treated as operating leases. Compute the aftertax cost of the lease for the four years. Compute the annual payment for the loan. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan. It is due to rounding.) Determine the cash flow effect of the CCA. Compute the aftertax cost of the borrow-purchase alternative. Compute the present value of the aftertax cost of the two alternatives. If the objective is to minimize the present value of aftertax costs, which alternative should be selected?
Transcribed Image Text:Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease
arrangement. If it purchases the asset, the cost will be $48,000. It can borrow funds for four years at 11 percent interest. The asset will
qualify for a 25 percent CCA. Assume a tax rate of 35 percent.
The other alternative is to sign two operating leases, one with payments of $15,000 for the first two years and the other with payments
of $18,500 for the last two years. The leases would be treated as operating leases.
a. Compute the aftertax cost of the lease for the four years. (Negative answers should be indicated by a minus sign. Round the final
answers to nearest whole doller.)
Year
Aftertax
cost
0
1
5
15000
9750
13250
12025
6475
b. Compute the annual payment for the loan. Use Appendix D. (Round the final answer to nearest whole dollar)
Annual payment
15474
c. Compute the amortization schedule for the loan. (Do not round intermediate calculations. Round the final answers to the nearest
whole dollar.)
Year
Beginning
Balance
Annual
Payments
Annual
Interest
Repayment on
Principal
Ending
Balance
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