None 29. Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease theasset under an operating lease arrangement. If it purchases the asset, the cost will be $10,000. Itcan 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 withpayments of $2,600 for the first two years and the other with payments of $4,600 for the last twoyears. In your analysis, round all values to the nearest dollar. The leases would be treated asoperating leases. Compute the aftertax cost of the lease for the four years. Compute the annualpayment for the loan. Compute the amortization schedule for the loan. (Disregard a small differencefrom a zero balance at the end of the loan. It is due to rounding.) Determine the cash flow effect ofthe CCA. Compute the aftertax cost of the borrow - purchase alternative. Compute the present valueof the aftertax cost of the two alternatives. If the objective is to minimize the present value ofaftertax costs, which alternative should be selected?

Determine the cash flow effect of the CCA:CCA for each year = $10,000 × 0.25 = $2,500Tax savings…

Answered: 29. Omni Enterprises is considering…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

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Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6 years at 2,000 per month or to purchase the equipment for 25,000 (a price considerably less than the expected fair value) after the initial lease term of 4 years. Why would this lease qualify as a finance lease?
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…
Bird Wing Bedding can lease an asset for 4 years with payments of $24,000 due at the beginning of the year. The firm can borrow at a 9% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar.
29. 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…
Bird Wing Bedding can lease an asset for 4 years with payments of $24,000 due at the beginning of the year. The firm can borrow at a 9% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing?
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.
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…
Findley Furniture Company must install $6.1 million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply: The equipment falls in the MACRS 5-year class. The applicable MACRS rates are 19%, 34%, 18%, 13%, 12%, and 4%. The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for $160,000 per year, payable at the end of the year. Findley’s federal-plus-state tax rate is 30%. If the money is borrowed, the bank loan will be at a rate of 8%, amortized in 5 equal installments to be paid at the end of each year. The tentative lease terms call for end-of-year payments of $1.40 million per year for 5 years. At the end of the lease term, the equipment will have an estimated salvage value of $950,000. At that time, Findley plans to replace the equipment regardless of whether the firm…
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
. The Randolph company has decided to acquire a new truck. One alternative is to lease the truck on a 4 year guideline contract for a lease payment of $10,000 per year, with payments to be made at the end of each year. The lease would include maintenance. Alternatively, the company could purchase the truck outright for $40,000 (depreciated under Straight Line Method), financing the purchase by a bank loan for the net purchase price and amortizing the loan over a 4-year period at an interest rate of 10% per year. Under the borrow to purchase arrangement, the company would have to maintain the truck at a cost of $1,000 per year, payable at year end. It has residual value of $10,000, which is the expected market value after 4 years, when the company plans to replace the truck irrespective of whether it leases or buys. The tax rate is 40%. So what is the company's PV cost of leasing? What is the company's PV cost of owning? Should the truck be leased or purchased?
Dunbar Corporation can purchase an asset for $29,000; the asset will be worthless after 15 years. Alternatively, it could lease the asset for 15 years with an annual lease payment of $2,494 paid at the end of each year. The firm’s cost of debt is 5%. The IRS classifies the lease as a non-tax-oriented lease. What is the net advantage to leasing?
Dunbar 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. $

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