Which financing option should NZ Ltd choose? Show your calculations of the cost of each financing option. Use whole numbers when rounding.
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NZ Ltd has decided to install a new item of plant, which will cost $500,000. The following alternative financing arrangements are available:
Purchasing finance by borrowing
Amount borrowed $500,000
Term of loan 5 years
Interest rate 9.7% payable annually
Lease plan
Amount of finance $500,000
Term 5 years
True interest rate 9.1%
Annual instalments $128,880
Additional information
The tax rate is 28%. Assume that tax benefits arising from deductible expenditures are received in the year of the expenditure. NZ Ltd uses the after-tax borrowing rate as a discount rate.
Which financing option should NZ Ltd choose?
Show your calculations of the cost of each financing option. Use whole numbers when rounding.
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- Deep Excavating Inc. is purchasing a bulldozer. The equipment has a price of $106,000. Themanufacturer has offered a payment plan that would allow Deep Excavating to make 10equal annual payments of 17,999 with the first payment due one year after the purchase.The other option is that Deep Excavating can borrow $106,000 from its bank to finance thepurchase at an annual rate of 10%.Required:a) Calculate the interest that Deep Excavating will pay if it chooses the paymentplan of the supplier.b) Calculate the Equal Annual Payments under option of Borrowings from Bank and the total interest to be paid under this option .Deep Excavating Inc. is purchasing a bulldozer. The equipment has a price of $106,000. Themanufacturer has offered a payment plan that would allow Deep Excavating to make 10equal annual payments of 17,999 with the first payment due one year after the purchase.The other option is that Deep Excavating can borrow $106,000 from its bank to finance thepurchase at an annual rate of 10%.Required:a) Calculate the interest that Deep Excavating will pay if it chooses the paymentplan of the supplier.b) Determine using proper calculations whether Deep Excavating should borrowfrom the bank or use the manufacturer's payment plan to pay for the equipment.Let us assume that an investor can obtain an 80% LTV loan for a property valued at 500,000 at a 10% interest rate to be amortized over 25 years with monthly payments. If the property generates $70,000 net operating income per year, answer the following. What would be the Before-Tax Cash Flow from the Property Sale (BTCFs) if the property were sold in Year 5 for $440,000? $63,344.93 $816,655.07 $396,382.36 $440,000.00
- Keystone Corporation is looking to purchase a building costing $1,000,000 by paying $200,000 cash on the purchase date and agreeing to make annual payments for the next ten years. The first payment is due one year after the purchase date. Keystone's incremental borrowing rate is 10%. Each of the annual payments is closest to: (FV of $1, PV of $1, FVA of $1, and PVA of $1) Note: Use the appropriate factor(s) from the tables provided.A company decides to borrow $100 000 at j1 = 12% in order to finance a new equipment purchase. One of the conditions of the loan is that the company must make annual payments into a sinking fund (the sinking fund will be used to pay off the loan at the end of 20 years). The sinking-fund investment will earn j1 = 6%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) a) What is the amount of each sinking-fund payment if they are all to be equal? Amount of each sinking-fund 2$ b) What is the total annual cost of the loan? Total annual cost c) What overall annual effective compound interest rate is the company paying to borrow the $100 000 when account is taken of the sinking-fund requirement? Compound interest rate %2. An electric generator is purchased for P80 000.00, it is expected to be used for five years and then sold for P15 000.00. Annual operating and maintenance costs are estimated at P20 000.00. Using a discount rate of 10%, determine the present worth of the investment. (Ans. — P146 502.00)
- Monroe Corporation is considering the purchase of new equipment. The equipment will cost $38,000 today. However, due to its greater operating capacity, Monroe expects the new equipment to earn additional revenues of $5,750 by the end of each year for the next 10 years. Required: 1-a. Assuming a discount rate of 7% compounded annually, calculate the present value of annuity. (FV of $1, PV of $1, FVA of $1, and PVA of $1) 1-b. Should Monroe make the purchase? Complete this question by entering your answers in the tabs below. Req 1A Req 1B Assuming a discount rate of 7.0% compounded annually, calculate the present value of annuity. (Use tables, Excel, or a financial calculator. Round your answer to 2 decimal places.) Present value of annuityDhofar water is installing new equipment at a cost of 140000 OMR. Expected cash flows from this project over the next three years will be 95000 OMR , 80000 OMR and 65000 OMR. The company's discount rate for such projects is 10 percent. What is the project's discounted payback period? Select one: a. 1.81 years O b. None of these Oc. 1.44 years Od. 1.63 years O e. 2.82 yearsHarper Corporation has the following information about the purchase of a new piece of equipment: Cash revenues less cash expenses $50,000 per yearCost of equipment $130,000Salvage value at the end of the 8 th year $22,000Increase in working capital requirements $35,000Tax rate 25 percentLife 8 years The cost of capital is 13 percent. Required:iii. Calculate the after-tax payback period.iv. Calculate the accrual accounting rate of return on original investment for each of the eightyears.v. Calculate the net present value (NPV).vi. Calculate the internal rate of return (IRR).
- The loan payment (principal plus interest) is $4,475 per year. The present value interest factor for a 5-year annuity at 15%: $15,000 / 3.3522. The $5,000 salvage value is a reduction to the cost of owning and results in an after tax cost of owning the equipment of $5,197. EXERCISE 14: PURCHASE VERSUS LEASE CALCULATION 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 1 $4,500 3,150 2,205 1,543 1,081 3 4 5A company is considering two mutually exclusive projects. Both require an initial cash outlay of Rs.20000 each and have a life of five years. The company's required rate of return is 10% and pays tax at a 35% rate. The projects with be depreciated on a straight-line basis. The before taxes cashflows (Rs.) Project 1 2 3 4 5 A 8000 8000 8000 8000 8000B 12000 6000 4000 10000 10000 calculate for each project. The NPV and the internal rate of return. Which project should be accepted and why.Esc You consider purchasing a new piece of equipment (7yr MACRS property) for your manufacturing process for $120,000. The equipment has a 6-year useful life and no salvage value. The equipment is expected to generate an additional $40,000 of net income before taxes and depreciation each year by using this upgraded system. The combined federal and state income tax rate= 35%. Annual inflation = 4%. a. Fill in the following table assuming MACRS depreciation rates Year 46°F Rain showers 0 1 F1 2 O 2 3 4 5 Pretax income 6 MACRS Taxable Depreciation income F2 - F3 + F4 Ⓡ b. If your MARR = 12%, should you purchase this system based on your real after-tax income? Why or why not? F5 8 C B Tax owed F6 Q Search G After tax income F7 Ca 7 F8 O Inflation adjustment factor O F9 ala LG F10 Real after tax income 0 A I THE F11 - 0 1 asod F12 + Prt Sc ScrLk Post-it sod Ins Post-it Del Backspace Post-it PgUp Home asod> Post-it Mumi 1-10 PgOn End Pause Break 11-15 11-15 C