Financial Management: Theory & Practice
16th Edition
ISBN: 9780357296776
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning US
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Textbook Question
Chapter 19, Problem 6P
Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply.
- (1) The machinery falls into the MACRS 3-year class.
- (2) Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.
- (3) The firm’s tax rate is 25%.
- (4) The loan would have an interest rate of 15%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4.
- (5) The lease terms call for $400,000 payments at the end of each of the next 4 years.
- (6) Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4th year.
- a. What is the cost of owning?
- b. What is the cost of leasing?
- c. What is the NAL of the lease?
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Sonja Jensen is considering the purchase of a fast-food franchise. Sonja will be operating on a lot that is to be converted into a parking lot in six years,
but that may be rented in the interim for $700 per month. The franchise and necessary equipment will have a total initial cost of $68,000 and a salvage
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Click the icon to view the projected operating revenues and expenses.
Click the icon to view the MACRS depreciation schedules.
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Sonja Jensen is considering the purchase of a fast-food franchise. Sonja will be operating on a lot that is to be converted into a parking lot in six years,
but that may be rented in the interim for $700 per month. The franchise and necessary equipment will have a total initial cost of $68,000 and a salvage
value of $9,000 (in today's dollars) after six years. Sonja is told that the future annual general inflation rate will be 5%. The projected operating
revenues and expenses (in actual dollars) other than rent and depreciation for the business are given in the table below. Assume that the initial
investment will be depreciated under the five-year MACRS and that Sonja's tax rate will be 30%. Sonja can invest her money at a rate of at least 14%
in other investment activities during this inflation-ridden period.
Click the icon to view the projected operating revenues and expenses.
Click the icon to view the MACRS depreciation schedules.
(a) Determine the cash flows associated with the…
Chapter 19 Solutions
Financial Management: Theory & Practice
Ch. 19 - Define each of the following terms: a. Lessee;...Ch. 19 - Distinguish between operating leases and financial...Ch. 19 - Prob. 3QCh. 19 - Prob. 4QCh. 19 -
Ch. 19 -
Ch. 19 -
Ch. 19 - Harmeling Paint Ball (HPB) Corporation needs a new...Ch. 19 - Reynolds Construction (RC) needs a piece of...Ch. 19 - Big Sky Mining Company must install 1.5 million of...
Ch. 19 - Prob. 7PCh. 19 -
Start with the partial model in the file Ch19 P08...Ch. 19 - Prob. 1MCCh. 19 - Prob. 2MCCh. 19 - Prob. 3MCCh. 19 - Lewis Securities Inc. has decided to acquire a new...Ch. 19 - Now assume that the equipments residual value...Ch. 19 - The lessee compares the present value of owning...Ch. 19 - (1) Assume that the lease payments were actually...Ch. 19 - Lewis’s management has been considering moving to...Ch. 19 - Prob. 9MC
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