Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 25, Problem 7P
a.
Summary Introduction
To determine: The amount of the lease-equivalent loan, if Company RI purchases the equipment.
Introduction: Lease is a contract between the lessee and lessor for the usage of asset. Lessee agrees to pay a specific amount as per the contract to the lessor for using the lessor’s asset.
b.
Summary Introduction
To determine: Whether Company RI is better off leasing the equipment or financing the purchase using the lease equivalent loan.
c.
Summary Introduction
To determine: The effective after-tax lease borrowing rate compared to Company RI’s actual after-tax borrowing rate.
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Red Bull F1 plans to purchase or lease $277,764 worth of equipment. Ifpurchased, the equipment will be depreciated on a straight-line basis overfive years, after which it will be worthless. If leased, the annual leasepayments will be $42,922 per year at the end of every year for five years.Assume Red Bull F1's borrowing cost is 8%, the tax rate is 35%, and thelease qualifies as a true tax lease.If Red Bull F1 purchases the equipment, what is the amount of the lease equivalent loan?
The Olsen Company has decided to acquire a new truck. One alternativeis to lease the truck on a 4-year contract for a lease payment of $10,000 per year, withpayments to be made at the beginning of each year. The lease would include maintenance.Alternatively, Olsen could purchase the truck outright for $40,000, financing with a bankloan for the net purchase price, amortized over a 4-year period at an interest rate of 10%per year, payments to be made at the end of each year. Under the borrow-to-purchasearrangement, Olsen would have to maintain the truck at a cost of $1,000 per year, payableat year-end. The truck falls into the MACRS 3-year class. The applicable MACRS depreciationrates are 33%, 45%, 15%, and 7%. The truck has a salvage value of $10,000, which is theexpected market value after 4 years, at which time Olsen plans to replace the truck regardlessof whether the firm leases the truck or purchases it. Olsen has a federal-plus-state taxrate of 40%.a. What is Olsen’s PV cost of…
The Olsen Company has decided to acquire a new truck. One alternative is to lease the truck on a four-year contract for a lease payment of $10,000 per year, with payments to be made at the beginning of each year. The lease would include maintenance. Alternatively, Olsen could purchase the truck outright for $40,000, financing with a bank loan for the net purchase price, amortised over a four-year period at an interest rate of 10 percent per year, payments to be made at the end of each year. Under the borrow-to-purchase arrangement, Olsen would have to maintain the truck at a cost of $1,000 per year, payable at year-end. The truck falls into the MACRS 3-year class. It has a salvage value of $10,000, which is the expected market value after four years, at which time Olsen plans to replace the truck irrespective of whether it leases or buys. Olsen has a marginal tax rate of 40 percent.
Should the truck be leased or purchased? Provide your decision based on NPV analysis.
Chapter 25 Solutions
Corporate Finance
Ch. 25.1 - In a perfect capital market, how is the amount of...Ch. 25.1 - Prob. 2CCCh. 25.2 - Prob. 1CCCh. 25.2 - Is it possible for a lease to be treated as an...Ch. 25.3 - Why is it inappropriate to compare leasing to...Ch. 25.3 - Prob. 2CCCh. 25.3 - Prob. 3CCCh. 25.4 - Prob. 1CCCh. 25.4 - Prob. 2CCCh. 25 - Suppose an H1200 supercomputer has a cost of...
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