You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,400 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed here: (the equipment has an economic life of 5 years). If your discount rate is 7.3%, what should you do? The net present value of the leasing alternative is $ The net present value of the buying alternative is $ (Round to the nearest dollar.) (Round to the nearest dollar.) What should you do? (Select from the drop-down menus.) The cost of is less, so you should the equipment.

You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,400 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed here: (the equipment has an economic life of 5 years). If your discount rate is 7.3%, what should you do? The net present value of the leasing alternative is $ The net present value of the buying alternative is $ (Round to the nearest dollar.) (Round to the nearest dollar.) What should you do? (Select from the drop-down menus.) The cost of is less, so you should the equipment.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter19: Lease Financing

Section: Chapter Questions

Problem 1P: Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the...

See similar textbooks

Similar questions

You need a particular piece of equipment for your production process. An equipment - leasing company has offered to lease the equipment to you for $9 comma 700 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed here: LOADING... (the equipment has an economic life of 5 years). If your discount rate is 7.2 %, what should you do? \table[[Year 0, Year 1, Year 2, Year 3, Year 4, Year 5], [-$40, 200, $2,100, -$2,100,- $2,100, - $2,100, - $2,100 c Year 0 - $40,200 Year 1 - $2,100 Year 2 - $2,100 Year 3 Year 4 Year 5 - $2,100 - $2,100 - $2,100
Please show proper steps.
= You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,400 per year if you sign a guaranteed five-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of five years). If your discount rate is 7.1%, what should you do? Year 0 - $40,100 Year 1 - $1,900 Year 2 - $1,900 The net present value of the leasing alternative is $ Year 3 - $1,900 (Round to the nearest dollar.) Year 4 - $1,900 Year 5 - $1,900
Can you help me with this problem with step by step explanation, please?
The Olsen Company has decided to acquire a new truck. One alternativeis to lease the truck on a 4-year contract for a lease payment of $10,000 per year, withpayments to be made at the beginning of each year. The lease would include maintenance.Alternatively, Olsen could purchase the truck outright for $40,000, financing with a bankloan for the net purchase price, amortized over a 4-year period at an interest rate of 10%per year, payments to be made at the end of each year. Under the borrow-to-purchasearrangement, Olsen would have to maintain the truck at a cost of $1,000 per year, payableat year-end. The truck falls into the MACRS 3-year class. The applicable MACRS depreciationrates are 33%, 45%, 15%, and 7%. The truck has a salvage value of $10,000, which is theexpected market value after 4 years, at which time Olsen plans to replace the truck regardlessof whether the firm leases the truck or purchases it. Olsen has a federal-plus-state taxrate of 40%.a. What is Olsen’s PV cost of…
Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the equipment or borrow 200 from a local bank and buy the equipment. Reynoldss balance sheet prior to the acquisition of the equipment is as follows: a. (1) What is RCs current debt ratio? (2) What would be the companys debt ratio if it purchased the equipment? (3) What would be the debt ratio if the equipment were leased and the lease not capitalized? (4) What would be the debt ratio if the equipment were leased and the lease were capitalized? Assume that the present value of the lease payments is equal to the cost of the equipment. b. Would the companys financial risk be different under the leasing and purchasing alternatives?
You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $503 per month per cab, or you can purchase the cabs outright for $30,200, in which case the cabs will last eight years. You must return the cabs to the leasing company at the end of the lease. The leasing company is responsible for all maintenance costs, but if you purchase the cabs, you will buy a maintenance contract that will cost $108 per month for the life of each cab. Each cab will generate revenues of $1,072 per month. Assume the cost of capital is fixed at 12.5%. (Hint: Make sure to round all intermediate calculations to at least four decimal places.) a. Calculate the NPV per cab of both possibilities: purchasing the cabs or leasing them. b. Calculate the equivalent monthly benefit of both opportunities. c. If you are leasing a cab, you have the opportunity to buy the used cab after five years. Assume that in five years a…
The Olsen Company has decided to acquire a new truck. One alternative is to lease the truck on a four-year contract for a lease payment of $10,000 per year, with payments to be made at the beginning of each year. The lease would include maintenance. Alternatively, Olsen could purchase the truck outright for $40,000, financing with a bank loan for the net purchase price, amortised over a four-year period at an interest rate of 10 percent per year, payments to be made at the end of each year. Under the borrow-to-purchase arrangement, Olsen would have to maintain the truck at a cost of $1,000 per year, payable at year-end. The truck falls into the MACRS 3-year class. It has a salvage value of $10,000, which is the expected market value after four years, at which time Olsen plans to replace the truck irrespective of whether it leases or buys. Olsen has a marginal tax rate of 40 percent. Should the truck be leased or purchased? Provide your decision based on NPV analysis.
Your boss asks you to review an option to lease an equipment storage facility that the firm needs. You are to compare it with the purchase of the facility. The following information are pertinent to your decision: - The facility will be needed for twelve years -If the facility is leased, the lessor will conduct all maintenance; if purchased, your firm must conduct maintenance - Facility maintenance is expected to cost $85000 per year - The cost to lease the facility is $800000 per year at the beginning of each year - The purchase price of the facility is $6000000 and the market value at the end of twelve years is expected to be $3000000 The before-tax cost of debt is 8%, and the tax rate is 30% - The company's current EBIT is $1800000 (before leasing or purchasing the facility). Assuming that the facility has a twelve-year depreciation life for tax purposes (i.e. it can be fully depreciated over twelve-years), compute the NPV for cach option and based on the cost, indicate your…
Freal is a commercial real estate developer. It is interested in acquiring a land to build a shopping centre. The cost associated with land acquisition and construction is estimated to be $60 million. There are two options available to Freal: Lease option where the company sells the property in year 1 and leaseback for two more years; Sale option where the company sells the property at the end of year 3. The cash flows for the lease and the sale option are: Year Lease ($ million) Sale ($ million) 1 60 10 2 10 10 3 10 75 a. Assume a required rate of return of ten per cent per annum. Calculate both NPV and IRR for the Lease option & the Sale option. Which is the preferred option? b. The directors of Freal would like to know the incremental IRR to help them with the decision. Calculate the incremental IRR, and explain which option should you choose based on the incremental IRR. Assume that with the addition of an outlay of $1 million at year…
Freal is a commercial real estate developer. It is interested in acquiring a land to build a shopping centre. The cost associated with land acquisition and construction is estimated to be $70 million. There are two options available to Freal: Lease option where the company sells the property in year 1 and leaseback for two more years; Sale option where the company sells the property at the end of year 3. The cash flows for the lease and the sale option are: Year Lease ($ million) Sale ($ million) 1 65 10 2 11 10 3 11 85 Assume a required rate of return of ten per cent per annum. Calculate both NPV and IRR forthe Lease option & the Sale option. Which is the preferred option? The directors of Freal would like to know the incremental IRR to help them with the decision. Calculate the incremental IRR, and explain which option should you choose based on the incremental IRR. Assume that with the addition of an outlay of $1 million at year 3, the…
Vishu