Question 1 You are an analyst employed to evaluate a financial lease relating to a piece of machinery. You are provided with the following information: Purchase price of machinery Useful life of machinery Corporate tax rate Net operating cash flows (before tax) produced by $70,000 the machine at the end of each year Required rate of return from the machine itself (after tax) Cost of debt capital used to purchase the machine (before tax) $200,000 5 years 30% 17% p.a. 9% p.a. The company accountant tells you the asset will be fully depreciated over its useful life and will have zero residual value. You are also told that the machine is integral to a project that management has already decided the company will proceed with. (a) What is the maximum lease payment that the company should be willing to pay? (b) If the lease payment required was greater than the amount documented in (a) what would be your advice to the company?

Question 1 You are an analyst employed to evaluate a financial lease relating to a piece of machinery. You are provided with the following information: Purchase price of machinery Useful life of machinery Corporate tax rate Net operating cash flows (before tax) produced by $70,000 the machine at the end of each year Required rate of return from the machine itself (after tax) Cost of debt capital used to purchase the machine (before tax) $200,000 5 years 30% 17% p.a. 9% p.a. The company accountant tells you the asset will be fully depreciated over its useful life and will have zero residual value. You are also told that the machine is integral to a project that management has already decided the company will proceed with. (a) What is the maximum lease payment that the company should be willing to pay? (b) If the lease payment required was greater than the amount documented in (a) what would be your advice to the company?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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