![Intermediate Financial Management (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_largeCoverImage.gif)
Concept explainers
a)
Case summary:
Company L has chosen to procure an unused advertise information and citation framework for its R domestic office. The framework gets current showcase costs and other data from a few on-line information administrations, at that point either shows the data on a screen or stores it for afterward recovery by the firm’s brokers. The framework moreover licenses clients to call up current cites on terminals within the campaign. The gear costs $1,000,000, and, in the event that it was obtained, company L might get a term credit for the total buy cost at a 10 percent intrigued rate. In spite of the fact that the gear contains a six-year valuable life, it is classified as a special-purpose computer, so it falls into the MACRS 3-year lesson. In the event that the framework was obtained, a 4-year upkeep contract can be obtained at a fetched of $20,000 per year, payable at the starting of each year. The hardware would be sold after 4 a long time, and the leading appraise of its leftover esteem at that time is $200,000. Be that as it may, since real-time show framework innovation is changing quickly, the real residual value is dubious. As an elective to the borrow-and-buy arrange, the gear producer educated Lewis that Solidified Renting would be willing to type in a 4-year rule rent on the gear, counting support, for installments of $260,000 at the starting of each year. Company L’s negligible federal-plus-state charge rate is 40 percent.
To determine: The consolidated
b)
To determine: The point of view on NPV of lessor if lease payment were set as $260,000 per year.
![Check Mark](/static/check-mark.png)
Want to see the full answer?
Check out a sample textbook solution![Blurred answer](/static/blurred-answer.jpg)
Chapter 19 Solutions
Intermediate Financial Management (MindTap Course List)
- An asset costs $675,000. The CCA rate for this asset is 25%. The asset's useful life is two years after which it will be worth $50,000. The corporate tax rate on ordinary income is 35%. The interest rate on risk-free cash flows is 10%. Required: a. What set of lease payments will make the lessee and the lessor equally well off, assuming payments are made at the end of the year? b. Show the general condition that will make the value of a lease to the lessor the negative of the value to the lessee. c. Assume that the lessee pays no taxes and the lessor is in the 35% tax bracket. For what range of lease payments does the lease have a positive NPV for both parties?arrow_forwardPlease help me with this question :) A detailed answer will be much appreciated.arrow_forwardGive me excel filearrow_forward
- what is the present value of the tax shield for the following project? the initial investment is $300,000. the project will last for 6 years, at which time the asset will be sold for $90,000. the asset will be depreciated on a declining balance basis at a rate of 20 percent. the firm's marginal tax rate is 40 percent. the firm's required rate of return is 8 percent a) 16,204.36 b) 82,539.68 c) 98,744.04 d) 66,335.32arrow_forwardAssume 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…arrow_forwardA firm wants to invest in a project whose financial information is below. The tax rate is 30%, and the MARR (Minimum Attractive Rate of Return) is 16%. Answer the following questions based on the information given in the table. Initial investment cost (TL) 155,000 Operating expenses (TL/year) 42,000 General maintenance cost (TL) (end of 3rd year) 26,500 Income (TL/year) 65,000 Salvage value (TL) 41,000 Economic life (year) 5 Taking into account the net cash flows of the project after tax; a) Calculate the annual depreciation amount required by the company for the project using the straight-line (SL) depreciation method. b) What is the project's net cash flow amount in the initial period? c) What is the project’s net cash flow amount in the operating periods? d) What is the project's net cash flow amount in the last period? e) Calculate the Net Present Value of the project and evaluate it from an economic point of view.arrow_forward
- An asset costs $682,000. The CCA rate for this asset is 32%. The asset's useful life is two years after which it will be worth $53,500. The corporate tax rate on ordinary income is 42%. The interest rate on risk-free cash flows is 10%. Assume payments are made at the end of the year. a. What set of lease payments will make the lessee and the lessor equally well off, assuming payments are made at the end of the year? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit "$" sign in your response.) Before tax payment $ b. Show the general condition that will make the value of a lease to the lessor the negative of the value to the lessee. OTLessor Lessee TLessor = T>Lessee OTLessor > T>Lessee c-1. Assume that the lessee pays no taxes. What would the lease payment have to be for lessee to be indifferent to the lease? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit "$" sign in your response.) Indifference lease…arrow_forward1) Smiley’s Manufacturing Company is considering the purchase of a small business, J&R Raw Material Limited. This company currently earns after-tax cash flow of 250,000 per year. On the basis of a review of similar risk investment opportunities, one must earn a 11% rate of return on the proposed purchase. Please answer the following questions: a. What is the firm’s value if the company’s after-tax cash flows are not expected to grow for the foreseeable future? b. What is the firm’s value if after-tax cash flows are expected to grow at an annual rate of 2.5% for the foreseeable future? c. What price should you pay for J&R Consulting Limited if the after-tax cash flows are not expected to grow for the first two years, but then in year 3 it is expected to grow by 3% and then from year 4 onwards it is expected to grow by a constant annual rate of 4%? d. Your friend, Jenny, is risk averse and is considering which between a government bond investment and the purchase of this…arrow_forwardAn asset costs $693,000. The CCA rate for this asset is 32%. The asset's useful life is two years after which it will be worth $59,000 The corporate tax rate on ordinary income is 42%. The interest rate on risk-free cash flows is 10%. Assume payments are made at the end of the year. a. What set of lease payments will make the lessee and the lessor equally well off, assuming payments are made at the end of the year? (Do not round intermediote calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Before tax payment $ 5865106 b. Show the general condition that will make the value of a lease to the lessor the negative of the value to the lessee. O TLessor Tstessee O TLessor T>Lessee O TLessor T>Lessee c-1. Assume that the lessee pays no taxes. What would the lease payment have to be for lessee to be indifferent to the lease? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) c-2. Assume that…arrow_forward
- ASB is considering leasing a new machine. The lease calls for 9 payments of $1,403 per year with the first payment occurring immediately. The machine costs $8,683 to buy. The present value of CCA tax shield is $998. The present value of its salvage value is $496 and the present value of CCA recapture is $61. ASB firm can borrow at a rate of 10%. The corporate tax rate is 30%. What is the NPV of leasing?arrow_forwardHelp pleasearrow_forward2. Nova Corp. is considering the purchase of a $300,000 machine that has a 5 year life with no salvage value. The asset will generate after-tax cash flows of $98,000 per year and the company has a marginal tax rate of 40%. The company has a required rate of return of 12%. The machine has a CCA rate of 30%. Alternatively, the company can also lease the machine with lease payments of $90,000 per year (beginning of the year) for 5 years and the before tax cost of borrowing in the lease is 9%. (15 points) A. If the company buys the machine, what is the NPV? (6 points) B. If the company leases the machine, what is the NAL? (8 points) C. Should the company buy or lease? (1 point)2arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)