The CaseWestern Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing S80,000. Themachine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are asfollows.Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for$20,000, to be paid along with the final lease payment.Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on astraight-line basis for 5 years.QUESTIONSa) Determine the after-cash outflow for Western Trucking under each alternative.b) Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt.c) Which alternative-lease or purchase would you recommend? Justify.

Cash Flow Statement is a part of the Financial Statement of a company. It literally means a…

Answered: The Case Western Trucking Company (a US…

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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Western Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5- year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. QUESTIONS a) Determine the after-cash outflow for Western Trucking under each alternative. a strawe. b) Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt. SE Le c) Which alternative-lease or purchase would you recommend? Justify.
A company is deciding whether to lease or buy a new truck. The truck can be leased for a 5-year period for $50,000 per year (due at the beginning of each year). The firm can borrow at 8%. The company's marginal tax rate is 35% and CCA is 22%. Calculate the PV of Lease. Round the PV of Lease to 2 decimals (e.g 22.05), and the unit is $. Your Answer: Answer units
Valentino Yacht Supply has assets valued at $1.2 million and liabilities of $.98 million. The firm wants to obtain new equipment via a capital lease. The equipment costs $200,000 and the present value of the lease payments is $175,000. With the lease, the firm’s balance sheet will show assets of ____ and liabilities of ____.
Compare the cost of the following leasing agreement with the finance charge on a loan for the same time period: The value of the car is $15,000 at the beginning of the lease period, and its projected residual value at the end of three years is $4,000. The lease requires a $500 down payment. Monthly payment $315 Acquisition fee $300 Disposition charge $150 Other things being equal, one would want to finance this car rather than take this lease if the finance cost were equal to or less than?
Triple Passion Group (TPG) plans to install a new dryer worth RM1.5 million at their snack processing plant. The acquisition of the asset can be done through a full bank loan with an interest rate of 5 percent per annum, and paid in annual installments for 5 years. Another alternative available at this time is for TPG to lease the machine from the leasing company Local Machinary Leasing (LML) Sdn Bhd. Based on the terms of the lease offered by LML, the financial manager of TPG found that there was some important information related to the machine lease that needed to be examined as follows; i. The dryer will be depreciated according to the straight line method for 5 years. ii. The maintenance cost of the machine is estimated at RM75,000 per year. iii. The current corporate tax rate is 28%. iv. The annual lease fee charged by LML Sdn Bhd is RM400,000 per annum for 5 years. v. During the lease period, the lessee is responsible for paying an insurance charge of RM30,000 annually. vi. If…
Dunbar Corporation can purchase an asset for $21,000; the asset will be worthless after 13 years. Alternatively, it could lease the asset for 13 years with an annual lease payment of $2,113 paid at the end of each year. The firm’s cost of debt is 7%. The IRS classifies the lease as a non-tax-oriented lease. What is the net advantage to leasing? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest cent.
Dell Canada advertises a computer bundle including printer, router and home network attached storage for $2995. The same system bundle may be leased for 24 months at $130 per month, at the beginning of each month. At the end of the lease, the bundle may be purchased for 10% of its retail price. What is the economic cost of the lease or purchase in present value, if a two year loan can be obtained at 12% compounded annually to purchase the computer? a Lease is better by $48.64 b Purchase is better by $48.64 c Lease is better by $109.38 d Purchase is better by $109.38 e Both options are the same.
Cost of Leasing Bird Wing Bedding can lease an asset for 4 years with payments of $17,000 due at the beginning of the year. The firm can borrow at a 6% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar. $
Dunbar Corporation can purchase an asset for $35,000; the asset will be worthless after 12 years. Alternatively, it could lease the asset for 12 years with an annual lease payment of $4,538 paid at the end of each year. The firm's cost of debt is 9%. The IRS classifies the lease as a non-tax-oriented lease. What is the net advantage to leasing? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest cent. $
Kuehner estimates that it can lease Parker Road Plaza for $18.50 per square foot (GLA) base rent with a 3 percent overage on gross sales in excess of $200 per square foot (GLA). The company expects rents to increase by 5 percent per year during the lease period and tenant reimbursements to run $8 per square foot (GLA) and to increase at the same rate as rents. Kuehner expects to have the shopping center 70 percent leased during the first year of operation After that, vacancies should average about 5 percent per year. The vacancy losses should be cal-culated on the entire gross potential income, which includes minimum rents, percentage rents and tenant reimbursements. Sales, which are expected to average $210 per square foot (GLA) for the first year of operation, should grow at 6 percent per year. The operating expenses are expected to average $14 per square foot of GLA for the first year and will increase at the same rate as the rents. Kuehner will collect an additional 5 percent of…
Inman Construction Company is considering selling excess machinery with a book value of $279,300 (original cost of $400,900 less accumulated depreciation of $121,600) for $274,300, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $283,200 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,100. a. Prepare a differential analysis, dated May 25 to determine whether Inman should lease (Alternative 1) or sell (Alternative 2) the machinery. For those boxes in which you must enter subtracted or negative numbers use a minus sign. Differential Analysis Lease Machinery (Alt. 1) or Sell Machinery (Alt. 2) May 25 Differential Effect Sell Machinery (Alternative 2) Lease Machinery on Income (Alternative 2) (Alternative 1) Revenues Costs Income (Loss) Feedback T Check My Work Subtract…
A Limited leased a fleet of trucks for a four year period, with a minimum payment of $30,000 per annum. The interest rate available to A Limited is 5% per annum. The fleet of trucks has a residual value of $45,000, the price at which A Ltd can purchase the fleet at the end of the lease. What is the present value of the lease of the fleet of trucks? Select one or more: O a. $243,401 O b. $150,000 O c. $106,380 O d. $143,402

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