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Please use the following information to answer the next THREE questions. Kaplan Brewery is considering either purchasing or leasing a $1.000.000 piece of specialized equipment, which would generate $224,000 of incremental sales for Kaplan for each year of the project. The equipme has a life of 6 years, belongs in a 25% CCA class, and has an estimated salvage value of $240,000 in 5 years. The before-tax cost of debt is 8% for this purchase. A lease on the equipment for 6 years is priced $172,000 per year, and lease payments are due at the beginning of the year Assume the tax deductibility benefit of the lease payments occurs at the time each fease payment is made. Kaplan's corporate tax rate is PV 34%

Please use the following information to answer the next THREE questions. Kaplan Brewery is considering either purchasing or leasing a $1.000.000 piece of specialized equipment, which would generate $224,000 of incremental sales for Kaplan for each year of the project. The equipme has a life of 6 years, belongs in a 25% CCA class, and has an estimated salvage value of $240,000 in 5 years. The before-tax cost of debt is 8% for this purchase. A lease on the equipment for 6 years is priced $172,000 per year, and lease payments are due at the beginning of the year Assume the tax deductibility benefit of the lease payments occurs at the time each fease payment is made. Kaplan's corporate tax rate is PV 34%

Essentials Of Investments
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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Please use the following information to answer the next THREE questions. Kaplan Brewery is considering either purchasing or leasing a $1.000.000 piece of specialized equipment, which would generate $224,000 of incremental sales for Kaplan for each year of the project. The equipment has a life of 6 years, belongs in a 25% CCA class, and has an estimated salvage value of $240,000 in 5 years. The before-tax cost of debt is 8% for this purchase. A lease on the equipment for 6 years is priced a $172,000 per year, and lease payments are due at the beginning of the year Assume the tax deductibility benefit of the lease payments occurs at the time each fease payment is made. Kaplan's corporate tax rate is 34% PV 5. What is the present value of the after-tax lease payments? A) $591,043 (B) $601,221 C) $613,838 PV Lease PMTS = $172,000 (1-0.34) PVIFAY D) $622,914 E) $641,145 <3 (1-1+ 5,28)= 6) 4.28 = 5.28-r-discontrole 8% (1-0.34) = 5.28% 6. Pretend that your answer to the previous question was exactly $600,000. Should Kaplan borrow money and buy the equipment or lease it? Why? A) Kaplan should buy the asset because the NPV of leasing versus buying would be -$450. buying? A) $113,204 B) Kaplan should buy the asset because the NPV of leasing versus buying would be $1,246. C) Kaplan should lease the asset because the NPV of leasing versus buying would be $450. D) Kaplan should lease the asset, because the NPV of leasing versus buying would be $1,246. E) Kaplan would be indifferent between buying the asset and leasing the asset. NAL to leasing = -450.55. It cost of Purchesung = Purchase price - PVCCATS > Imil - 224,147.87 P 775, 802.33terschim Vot selvese volve = 240000 x PVIFE 5.28%, 6 years b = 4762.52.88 PV of Lease PMTS = 600,000 7. What would the before-tax lease payment have to be to make Kaplan indifferent between leasing and B) $171,522 C) $119,182 D) $180,578 E) $155,221 8. Which of the following is a valid argument for leasing? A) Avoiding capital expenditure controls B) Increased resale costs C) Transferring risk cheet financing (1
Transcribed Image Text:Please use the following information to answer the next THREE questions. Kaplan Brewery is considering either purchasing or leasing a $1.000.000 piece of specialized equipment, which would generate $224,000 of incremental sales for Kaplan for each year of the project. The equipment has a life of 6 years, belongs in a 25% CCA class, and has an estimated salvage value of $240,000 in 5 years. The before-tax cost of debt is 8% for this purchase. A lease on the equipment for 6 years is priced a $172,000 per year, and lease payments are due at the beginning of the year Assume the tax deductibility benefit of the lease payments occurs at the time each fease payment is made. Kaplan's corporate tax rate is 34% PV 5. What is the present value of the after-tax lease payments? A) $591,043 (B) $601,221 C) $613,838 PV Lease PMTS = $172,000 (1-0.34) PVIFAY D) $622,914 E) $641,145 <3 (1-1+ 5,28)= 6) 4.28 = 5.28-r-discontrole 8% (1-0.34) = 5.28% 6. Pretend that your answer to the previous question was exactly $600,000. Should Kaplan borrow money and buy the equipment or lease it? Why? A) Kaplan should buy the asset because the NPV of leasing versus buying would be -$450. buying? A) $113,204 B) Kaplan should buy the asset because the NPV of leasing versus buying would be $1,246. C) Kaplan should lease the asset because the NPV of leasing versus buying would be $450. D) Kaplan should lease the asset, because the NPV of leasing versus buying would be $1,246. E) Kaplan would be indifferent between buying the asset and leasing the asset. NAL to leasing = -450.55. It cost of Purchesung = Purchase price - PVCCATS > Imil - 224,147.87 P 775, 802.33terschim Vot selvese volve = 240000 x PVIFE 5.28%, 6 years b = 4762.52.88 PV of Lease PMTS = 600,000 7. What would the before-tax lease payment have to be to make Kaplan indifferent between leasing and B) $171,522 C) $119,182 D) $180,578 E) $155,221 8. Which of the following is a valid argument for leasing? A) Avoiding capital expenditure controls B) Increased resale costs C) Transferring risk cheet financing (1
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