EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
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.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Riverside Inc. plans to purchase or lease $220,000 worth of new equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for five years. Assume Riverside’s borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease. If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?
a. $292,884
b. $192,488
c. $197,358
d. $195,70
0 e. $190,237
ANB Leasing is planning to lease an asset costing $210,000. The lease period will be 6 years. At the end of 6 years, the salvage value is estimated to be $30,000. The asset will be depreciated on a straight-line basis of $30,000 per year over the 6-year period. ANB's marginal income tax rate is 40%, but its average tax rate is only 31.5%. Assuming ANB Leasing requires a 12% after-tax rate of return on the lease, determine the required annual beginning of the year lease payments.
a. $31,592 b. $46,120 c. $45,609 d. $52,653
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?
Chapter 25 Solutions
EBK 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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Big Sky Mining Company must install $1.5 million of new machinery in its Nevadamine. It can obtain a bank loan for 100% of the purchase price, or it can lease themachinery. 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, propertytaxes, 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 onlyinterest 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, andthe 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?arrow_forwardMauer Mining Company leases a special drilling press with annual payments of $100,000. The contract calls for rent payments at the beginning of each year for a minimum of 6 years. Mauer Mining can buy a similar drill for $490,000, but it will need to borrow the funds at 10%. a. Determine the present value of the lease payments at 10%. b. Should Mauer Mining lease or buy this drill?arrow_forwardBig 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. What is the cost of owning? What is the cost of leasing? What is the NAL of the lease?arrow_forward
- Thomas Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 21% . The company expects to use the equipment for 4 years, with no expected salvage value. The purchase price is $2 million and MACRS depreciation, 3-year class, will apply. If the company enters into a 4-year lease, the lease payment is $460,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 11% . a. Calculate the cost of purchasing the equipment with debt.b.Calculate the cost of leasing the equipment.C.Calculate the net advantage to leasing. Should the company purchase or lease the equipmentarrow_forwardThe 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…arrow_forwardDunbar Corporation can purchase an asset for $35,000; the asset will be worthless after 12 years. Alternatively, it could lease the asset for 12 years with an annual lease payment of $4,538 paid at the end of each year. The firm's cost of debt is 9%. The IRS classifies the lease as a non-tax-oriented lease. What is the net advantage to leasing? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest cent. $arrow_forward
- Assume a 10-year lease contract on some equipment with equal lease payments at the end of each year. The equipment would cost $200,000 to buy and would be depreciated straight-line over 10 years to a zero-salvage value. The applicable cost of debt is 10%. The lessee does not expect to owe taxes for the next 15 years while the lessor's tax rate is 21%. What is the Lessee's maximum acceptable lease payment?arrow_forwardASF wishes to acquire a 100,000 multifacet cutting machine the machine has a useful life of eight years, after which there is no expected salvage value. If ASF were to finance the cutting machine by signing an eight-year lease contract, annual lease payments of $16,000 would be required. The company could also finance the purchase of the machine with a 12 percent term loan having a payment schedule of the same general configuration as the lease payment schedule. The asset falls in the five-year property class for cost recovery (depreciation) purposes, and the company has a 35 percent tax rate. What is the present value of cash outflows for each of these alternatives, using the after-tax cost of debt as the discount rate? Which alternative is preferred?arrow_forward29. Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The asset will qualify for a 25 percent CCA. Assume a tax rate of 35 percent. The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar. The leases would be treated as operating leases. Compute the aftertax cost of the lease for the four years. Compute the annual payment for the loan. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan. It is due to rounding.) Determine the cash flow effect of the CCA. Compute the aftertax cost of the borrow-purchase alternative. Compute the present value of the aftertax…arrow_forward
- Brambles Inc is looking to acquire a new equipment for its project that will last for eight years. The after-tax required rate of return of the project is 16% per annum. Brambles can borrow at a before-tax interest rate of 8.5% per annum and buy the equipment outright or lease the equipment from ABC's Leasing. Brambles has evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease is calculated to be -$12,000. However, the purchase cost of the equipment was under- estimated by $24,000, also the salvage value of the equipment at the end of the lease term was under- estimated by $8,000. The applicable corporate tax rate is 30% and the equipment is going to be fully depreciated over the eight years using a straight-line method. Will Brambles' decision be affected by adjusting the purchasing cost and salvage value? O It is now indifferent between lease and borrow-to-buy. The equipment should still be purchased by borrowing. None of the other answers is…arrow_forwardABC Inc. is considering leasing some equipment for 10 years with equal lease payments at the end of each year. The equipment would cost $200,000 to buy and would be depreciated straight-line over 10 years to a zero-salvage value. The applicable cost of debt is 10%. The lessee does not expect to owe taxes for the next 15 years while the lessor's tax rate is 21%. What is the Lessor's minimum acceptable lease payment? (Do not round your intermediate calculations. Round only your final answer to 2 decimal places, if necessary. Note: Your final answer must be in dollars without the $ sign at the beginning)arrow_forwardBBL Inc. is considering an equipment for its new factory. It can either purchase the equipment for $55,200 or lease it from QuickLease with 8 annual lease payments of $8,320 (payable at the beginning of each year). The equipment has CCA rate of 26% and salvage value of $8,160 at the end of year 8. A. BBL has tax rate of 24% and cost of debt of 7.2%. The asset class remains open with positive UCC after the sale of the equipment. Calculate the NPV of leasing for BBL and the maximum annual lease payment it will pay. B. QuickLease has tax rate of 31% and cost of debt of 4.8%. The equipment is the only asset in the asset class for QuickLease. Calculate the NPV of leasing for QuickLease and the minimum annual lease payment it will ассept.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License