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?

Hello Yellow Ltd will charge Digit up Ltd a break-even lease payment of £22,000 for leasing the…

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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To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 25%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.) a. $132 b. $119 c. $153 d. $139 e. $146
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