Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10payments of $1,000 per year with the first payment occurring immediately. The computer would cost$7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actualsalvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%.The corporate tax rate is 30%. What is the after-tax cash flow from leasing relative to the after-tax cashflow from purchasing in years 1-9?

Cash flow is a critical financial metric that reflects the movement of funds in and out of a…

Answered: Your firm is considering leasing 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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Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $290,000. The company can borrow $290,000 for three years at 11 percent annual interest or for one year at 9 percent annual interest. Assume interest is paid in full at the end of each year. a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 9 percent rate? Compare this to the 11 percent three-year loan. 9 percent loan 11 percent loan Interest savings Interest b. What if interest rates on the 9 percent loan go up to 14 percent in year 2 and 17 percent in year 3? What would be the total interest cost compared to the 11 percent, three-year loan? Fixed-rate 11% loan Variable-rate loan Additional interest cost Interest
11) A new robotic welder can be leased for 5 years with annual payments of $300,000 with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be depreciated straightline to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8 percent and has a tax rate of 23 percent. What discount rate should be used for valuing the lease? A) 9.84 percent B) 19.72 percent C) 6.16 percent D) 8.00 percent E) 6.32 percent
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $6,000,000 and would be depreciated straight-line to zero over six years. Because of radiation contamination, it will actually be completely valueless in six years. Assume that the tax rate is 21 percent. You can borrow at 6 percent before taxes. What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Break-even lease payment
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $4.3 million and would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $1.275 million per year for four years. Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. What are the cash flows from the lease from the lessor's viewpoint? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Cash flows from the lessor's viewpoint
You want to buy a new plant with a price of Rs. 400,000. The borrowing cost is 10% interest rate to be paid at the end of each year. If it is purchased, the maintenance fee is Rs.10,000 per year paid at the end of each year. The depreciation falls in the MACRS 5-year class, rates are 30%, 20%, 10%, and 09%. The tax is 40%. Alternatively, the plant can be taken on lease for Rs. 85,000 upon delivery with 4 more annual rentals of Rs. 85,000 to be made at the end. This alternative includes maintenance requirement. After 04 years the asset’s salvage value is expected to be Rs. 20, 000. Required: What do you suggest should the plant be leased or purchased? Why?
Your firm needs a machine which costs $120,000, and requires $33,000 in maintenance for each year of its 5 year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 5-year class life category. Assume a tax rate of 35 percent and a discount rate of 15 percent. What is the depreciation tax shield for this project in year 5?
Consider a firm A that wishes to acquire an equipment. The equipment is expected to reduce costs by $5700 per year. The equipment costs $29000 and has a useful life of 7 years. If the firm buys the equipment, they will depreciate it straight-line to zero over 7 years and dispose of it for nothing. They can lease it for 7 years with an annual lease payment of $8000. If the after-tax interest rate on secured debt issued by company A is 7% and tax rate is 25%, what is the Net Advantage to Leasing (NAL)?(keep two decimal places) Answer: -18233.59
A physics lab is considering leasing a diagnostic scanner that costs $5,800,000, and it would bedepreciated straight-line to zero over four years. Because of radiation contamination, it will actuallybe completely valueless in four years. You can lease it for four years. Assume tax rate is 21% for theleasing company (lessor) and zero for the lab. The cost of borrowing is 8%. Over what range of leasepayments will the lease be profitable for both lessee and lessor?
The Wildwood Widget Company needs a milling machine for its new assembly line. The machine presently costs $85,000, but has a cost inflation rate of 2%. Widget will not need to purchase the machine for 3 years. If general inflation is expected to be 4% per year during those 3 years, determine the price of the machine. What is the present worth of the machinery if the market rate of interest for Widget is 25%?
You are contemplating the replacement of an old printing machine with a new model costing $63,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and the current book value of $14,000 versus the current market value of $21,000. The firm's corporate tax rate is 24 percent. If the company sells the old machine at the market value, what is the initial after-tax cash outlay for the new printing machine purchase?
1. You are planning on leasing a drying oven for your production line. The oven lease terms involve an initial payment of $1000 when the oven is delivered, an annual payment of $2000 for seven years, and a final recovery payment of $1000 when the leasing company takes the oven back at the end of the lease. Your corporate cost of money is 4% and the leasing company is responsible for all maintenance on the oven. What is the equivalent (NPV) value of this cashflow today? 1.a The oven you are leasing (from question 1), is expected to generate a cost savings of $5000 per year over the older oven you are currently using. What is the equivalent NPV value of the cashflow when these savings are included?
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