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…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

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A company is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $58,000 per year with the first payment occurring immediately. The equipment would cost $250,000 to buy and would be straight-line depreciated to a zero salvage value over 5 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6%. The corporate tax rate is 21 percent. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0? -$2,645.01 -$2,820.71 -$2,996.41 -$3,172.11 -$3,347.81
Consider a firm A that wishes to acquire an equipment. The equipment is expected to reduce costs by $4200 per year. The equipment costs $25000 and has a useful life of 5 years. If the firm buys the equipment, they will depreciate it straight-line to zero over 5 years and dispose of it for nothing. They can lease it for 5 years with an annual lease payment of $5000. If the after-tax interest rate on secured debt issued by company A is 2% and tax rate is 35%, what is the Net Advantage to Leasing (NAL)?(keep two decimal places)
Assume zero taxes. Equipment can be leased at $10,000 per year (first payment one year hence) for ten years or purchased at a cost of $64,177. The company has a weighted average cost of capital of 15 percent. A bank has indicated that it would be willing to make a loan of $64,177 at a cost of 10 percent. Should the company buy or lease? The equipment will be used for ten years. There is zero salvage value.
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
Assume zero taxes. The Black Gold Oil Company can lease equipment at $10,000 per year (first payment 1 year hence) for 10 years or purchased at a cost of $64,177. The company has a weighted average cost of capital of 15 percent. A bank has indicated that it would be willing to make the loan of $64,177 at a cost of 10 percent. Questions: 1. Should the company buy or lease? There are no uncertainties. The equipment will be used for 10 years. There is zero salvage value. 2. If the bank was willing to lend funds at 9 percent, should the company buy or lease? 3. If the company pays $64,177 for the equipment, it will save $10,000 a year lease payments for 10 years. 4. Comparing "Buy" versus "Lease", what internal rate of return will it earn on its "investment"? 5. Now assume a marginal tax rate of 0.4. Assume that the funds can be obtained for 0.10 at a bank. The company uses sum-of-the-years' digits depreciation for taxes. Should the firm buy or lease? (Assume that the present value of the…
Next Corporation needs a piece of equipment that costs $270 million. Next can either lease the equipment or borrow $270 million from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that Next’s tax rate is 35% and that the equipment’s depreciation would be $90 million per year. If the company leased the asset on a 3-year lease, the payment would be $105 million at the beginning of each year. If Next borrowed and bought, the bank would charge 12% interest on the loan. In either case, the equipment is worth nothing after 3 years and will be discarded. Should Next lease or buy the equipment? (solve in excel)
A firm wants the use of a machine that costs $135,000. If the firm purchases the equipment, it will depreciate the equipment at the rate of $27,000 a year for four years, at which time the equipment will have a residual value of $27,000. Maintenance will be $2,500 a year. The firm could lease the equipment for four years for an annual lease payment of $32,460. Currently, the firm is in the 40 percent income tax bracket. Determine the firm's cash inflows and outflows from purchasing the equipment and from leasing. Use a minus sign to enter negative values, if any. If the answer is zero, enter "0". Round your answers to the nearest cent. Year 0 1 2 3 4 Net cash flows under leasing $ $ $ $ $ Net cash flows under purchasing $ $ $ $ $ If the firm uses a 14 percent cost of funds to analyze decisions that involve payments over more than a year, should management lease the equipment or purchase it? Use…
A firm is considering purchasing a machine that costs $56000. It will be used for six years, and the salvage value at that time is expected to be zero. The machine will save $45000 per year in labor, but it will incur $9000 in operating and maintenance costs each year. The machine will be depreciated according to five-year MACRS. The firm's tax rate is 40%, and its after-tax MARR is 14%. Should the machine be purchased?
Firm A is considering leasing equipment. The equipment will provide $2.8 million in annual pre-tax cost savings. The cost of leasing is $8.78 million and the equipment will be depreciated straight-line to zero over five years. Assume a tax rate of 21% and a borrowing rate of 7%. Firm B has offered to lease this equipment for payments of $1.95 million per year. Assume that payments for the lease are made at the start of the year. i) What is the maximum lease payment that would be acceptable to Firm A? ii) Suppose now Firm B requires Firm A to pay a $600,000 security deposit at the inception of the lease, and this amount is refunded at the end of the lease. If the lease payment is still $1.95 million. Is it advantageous for Firm A to lease the equipment now?
Your company is considering a new computer system that will initially cost $1 million. It will save $400,000 a year in inventory and receivables management costs. The system is expected to last for five years and will be depreciated using 3-year MACRS. The system is expected to have a salvage value of $50,000 at the end of year 5. The project will require an initial $20,000 investment in net working capital and the marginal tax rate is 40%. The required return is 8%. 0 OCF NCS NWC CFFA Year 1 $373,320 - $1,000,000 $ 20,000 - $1,020,000 $373,320 - Answer: What is the correct vaule for blank ? 2 ($) ($ @ ) 3 4 5 $299,280 $269,640 $ 240,000 ($ @ ) ($ @ ) ($ ® ) With all this, the NPV of the project is ($). Therefore, this project should be accepted. $299,280 $269,640
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? Create a dummy Balance Sheet of your own with dummy values of Assets and Liabilities and show the accounting treatment of operating and financial leases with brief explanation of each.
RKE & Associates is considering the purchase of a building it currently leases for $30,000 per year. The owner of the building put it up for sale at a price of $180,000, but because the firm has been a good tenant, the owner offered to sell it to RKE for a cash price of $160,000 now. If purchased now, how long will it be before the company recovers its investment at an interest rate of 15.00% per year? Solve by using the NPER function. The company will recover its investment in years.

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