WF Computers is looking to manufacture and distribute the virtual keyboard. The company is looking for venture to obtain equipments for the production of microphones for keyboard. Considering the sensitivity issue, WF Company will require specialized equipment for its production process. Later, WF Company found a seller for the equipment who is willing to sell the equipment for $6.1 million. After 3 years the equipment falls in three years MACRS depreciation class. The equipment value became $780,000. Alternatively, WF is looking to lease the equipment from HR Leasing Company. The lease agreement states that there is a four annual payment of $1.48 million due at the opening of the year. WF Company must make a security deposit of $400,000 and can issue bonds with a yield of 11%. To determine : The manner by which the inclusion of cancellation option affects the leasing value. Introduction: Lease: An asset can be leased or purchased. A lease in a contractual agreement made between two parties; lessor and lessee. The agreement explains the use of asset for a particular time by lessee. In return, lessor gets periodical payments for the use of asset.

Question

Want to see the full answer?

Answer 1

Question

Chapter 27, Problem 4M

Summary Introduction

Case summary:

WF Computers is looking to manufacture and distribute the virtual keyboard. The company is looking for venture to obtain equipments for the production of microphones for keyboard. Considering the sensitivity issue, WF Company will require specialized equipment for its production process. Later, WF Company found a seller for the equipment who is willing to sell the equipment for $6.1 million. After 3 years the equipment falls in three years MACRS depreciation class.

The equipment value became $780,000. Alternatively, WF is looking to lease the equipment from HR Leasing Company. The lease agreement states that there is a four annual payment of $1.48 million due at the opening of the year. WF Company must make a security deposit of $400,000 and can issue bonds with a yield of 11%.

To determine: The manner by which the inclusion of cancellation option affects the leasing value.

Introduction:

Lease: An asset can be leased or purchased. A lease in a contractual agreement made between two parties; lessor and lessee. The agreement explains the use of asset for a particular time by lessee. In return, lessor gets periodical payments for the use of asset.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Scenario three: If a portfolio has a positive investment in every asset, can the expected return on a portfolio be greater than that of every asset in the portfolio? Can it be less than that of every asset in the portfolio? If you answer yes to one of both of these questions, explain and give an example for your answer(s). Please Provide a Reference

Hello expert Give the answer please general accounting