Wakanda Airlines Limited is contemplating leasing an aircraft costing $90 million. The aircraft has a useful life of 10 years and is depreciated using the straight-line method over its useful life, with no scrap value at the end. Further, annual lease payment is $12 million per annum, paid at the end of each year for the next 15 years. Wakanda Airlines Limited can borrow at an interest rate of 10% before tax; while it enjoys a tax rate of 40%. Required: (i) Using appropriate computation, what is the Net Advantage of Leasing to Wakanda Airlines Limited should buy or lease the aircraft. (ii) Should Wakanda Airlines Limited buy or lease the asset if the tax rate is reduced to 20%?

Wakanda Airlines Limited is contemplating leasing an aircraft costing $90 million. The aircraft has a useful life of 10 years and is depreciated using the straight-line method over its useful life, with no scrap value at the end. Further, annual lease payment is $12 million per annum, paid at the end of each year for the next 15 years. Wakanda Airlines Limited can borrow at an interest rate of 10% before tax; while it enjoys a tax rate of 40%. Required: (i) Using appropriate computation, what is the Net Advantage of Leasing to Wakanda Airlines Limited should buy or lease the aircraft. (ii) Should Wakanda Airlines Limited buy or lease the asset if the tax rate is reduced to 20%?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 9P

See similar textbooks

Similar questions

Wakanda Airlines Limited is contemplating leasing an aircraft costing $90 million. The aircrafthas a useful life of 10 years and is depreciated using the straight-line method over its useful life,with no scrap value at the end.Further, annual lease payment is $12 million per annum, paid at the end of each year for thenext 15 years. Wakanda Airlines Limited can borrow at an interest rate of 10% before tax; whileit enjoys a tax rate of 40%.Required:(i) Using appropriate computation, what is the Net Advantage of Leasing to WakandaAirlines Limited should buy or lease the aircraft. (ii) Should Wakanda Airlines Limited buy or lease the asset if the tax rate is reduced to20%?
ASB is considering leasing a new machine. The lease calls for 9 payments of $1,403 per year with the first payment occurring immediately. The machine costs $8,683 to buy. The present value of CCA tax shield is $998. The present value of its salvage value is $496 and the present value of CCA recapture is $61. ASB firm can borrow at a rate of 10%. The corporate tax rate is 30%. What is the NPV of leasing?
Hull Manufacturing Co. must decide whether to purchase or lease a new piece of equipment. The equipment can be leased for $4,000 a year or purchased for $15,000. The lease includes maintenance and service. The salvage value of the equipment at the end of five years is $5,000. If the equipment is owned, service and maintenance charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing would you choose? Use the following capital cost allowance amounts. Year Amount $4,500 3,150 2,205 1,543 1,081 2 3 4
BBL Inc. is considering an equipment for its new factory. It can either purchase the equipment for $55,200 or lease it from QuickLease with 8 annual lease payments of $8,320 (payable at the beginning of each year). The equipment has CCA rate of 26% and salvage value of $8,160 at the end of year 8. A. BBL has tax rate of 24% and cost of debt of 7.2%. The asset class remains open with positive UCC after the sale of the equipment. Calculate the NPV of leasing for BBL and the maximum annual lease payment it will pay. B. QuickLease has tax rate of 31% and cost of debt of 4.8%. The equipment is the only asset in the asset class for QuickLease. Calculate the NPV of leasing for QuickLease and the minimum annual lease payment it will ассept.
Emaar Builders need to acquire the use of a crane for construction business, and are considering buying or leasing a crane. The crane costs Rs. 2,500,000, and is subject to the straight-line method of depreciation to a zero salvage value at the end of 5 years. In contrast, the lease rent is Rs 550,000 per year to be paid in advance each year for 5 years. Emaar Builders can raise debt at 18% payable in equal annual instalments, each instalment due at the beginning of the year. The company is in the 30% tax bracket. Should it lease or buy the crane?
Intel Inc is looking to acquire a new equipment for a project that will last for eight years. The after-tax required rate of return of the project is 12% per annum. Intel can borrow at a before-tax interest rate of 10% per annum and buy the equipment outright or lease the equipment from ABC’s Leasing. The applicable corporate tax rate is 28% and the equipment will be fully depreciated to zero over the eight years using a straight-line method. Intel evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease versus borrow-to-buy analysis was estimated to be -$10,000. However, subsequently Intel realised that in the analysis the purchase cost of the equipment had been under-estimated by $20,000, and also the salvage value of the equipment (at the end of the lease term) had been under-estimated by $7,000. Given the correct purchase price and salvage value, which of the following statements now accurately describes Intel’s decision regarding the acquisition of…
Riverside Inc. plans to purchase or lease $220,000 worth of new equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for five years. Assume Riverside’s borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease. If Riverton purchases the equipment, what is the amount of the lease-equivalent loan? a. $292,884 b. $192,488 c. $197,358 d. $195,70 0 e. $190,237
Firm A is considering leasing equipment. The equipment will provide $2.8 million in annual pre-tax cost savings. The cost of leasing is $8.78 million and the equipment will be depreciated straight-line to zero over five years. Assume a tax rate of 21% and a borrowing rate of 7%. Firm B has offered to lease this equipment for payments of $1.95 million per year. Assume that payments for the lease are made at the start of the year. i) What is the maximum lease payment that would be acceptable to Firm A? ii) Suppose now Firm B requires Firm A to pay a $600,000 security deposit at the inception of the lease, and this amount is refunded at the end of the lease. If the lease payment is still $1.95 million. Is it advantageous for Firm A to lease the equipment now?
Lucky Cement wants to evaluate an acquisition of an equipment worth Rs 300,000. Its marginal tax rate is 35 percent. If purchased, the depreciation of equipment will take place at straight line method. The salvage value of the equipment is assumed to be 30,000 at the end of its useful life of 10 years. If the equipment is purchased, Lucky cement will finance the asset through borrowing from bank at annual before tax cost of 10%. If equipment is leased, Lucky Cement can have the equipment at Rs 38000 pre-tax rate per year, which is to be paid at the beginning of each year. Company’s weighted average after tax cost of capital is 10 percent. Compute the net advantage to leasing What alternative, leasing or owning, should be chosen? Explain
BigCo is considering leasing the new equipment that it requires, for $146000 a year, payable in advance. The cost of the equipment is $775000, and will last for 5 years. The expected scrap value at the end of 5th year is $140000. Assume that the equipment will be fully depreciated under straightline method. The tax rate is 35%, the cost of equity is 13% and the cost of debt is 10%. i. What is the net cost of buying? ii. What is the net cost of leasing? iii. What is the net advantage of leasing (NAL)? iv. What is the maximum lease payment that would make BigCo indifferent between leasing or buying?
Next Corporation needs a piece of equipment that costs $270 million. Next can either lease the equipment or borrow $270 million from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that Next’s tax rate is 35% and that the equipment’s depreciation would be $90 million per year. If the company leased the asset on a 3-year lease, the payment would be $105 million at the beginning of each year. If Next borrowed and bought, the bank would charge 12% interest on the loan. In either case, the equipment is worth nothing after 3 years and will be discarded. Should Next lease or buy the equipment? (solve in excel)
Big Sky Mining Company must install $1.5 million of new machinery in its Nevadamine. It can obtain a bank loan for 100% of the purchase price, or it can lease themachinery. Assume that the following facts apply.(1) The machinery falls into the MACRS 3-year class.(2) Under either the lease or the purchase, Big Sky must pay for insurance, propertytaxes, and maintenance.(3) The firm’s tax rate is 25%.(4) The loan would have an interest rate of 15%. It would be nonamortizing, with onlyinterest paid at the end of each year for four years and the principal repaid at Year 4.(5) The lease terms call for $400,000 payments at the end of each of the next 4 years.(6) Big Sky Mining has no use for the machine beyond the expiration of the lease, andthe machine has an estimated residual value of $250,000 at the end of the 4th year.a. What is the cost of owning?b. What is the cost of leasing?c. What is the NAL of the lease?