Your company "Digitup Ltd” needs a new earth moving machine which it can buy for GBP120,000. The economic life of the machine is 6 years. It can lease the machine for 6 years,with lease payments due at the start of each year, or buy it outright.Hello Yellow Ltd is a leasing company specialising in construction equipment. Due to itsvolume trades with the supplier it can get a superior discount and buy the machine for GBP100,000 and depreciate it over 5 years to zero terminal value with maintenance andadministration costs of an estimated £12,000 p.a.. Inflation is zero, Hello Yellow's cost ofcapital is 7% and has an average tax rate of 28%. What is the break-even lease that thecompany will charge if it lease for 6 years with payment annually in advance?Is this lease attractive to Digitup if its cost of capital is 8% and its tax rate is 24%? It willborrow to buy at its cost of capital and amortise the loan fully over 5 years depreciating theasset over that period on a straight-line basis.

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Answered: Your company "Digitup Ltd” needs a new…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are considering whether or not to purchase another new air conditioner refrigerant recovery machine that costs RM13600.00 per piece. He knows that his total earnings for the past three years (sales for air conditioning service) have averaged RM33600.00 per year for 5 working days a week and have remained steady. You are sure that you will be able to sell another 200 air conditioning service per year for RM80.00 labor a piece as a result of having this new capability. You decided: i. Calculate and explain what would your shop ROI be over three years by taking this opportunity based on the information. ii. Calculate the ROI percentage (%) for the new machine's sales.
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