QUESTION 4CBC Ltd. wishes to acquire a K100,000 brick making machine which has auseful life of eight years. At the end of this time, the machine's scrap valuewill be K8,000. The asset will be depreciated using the straight line methodover its eight-year life. The company can use either lease or debt financing.Lease payment of K16,000 at the beginning of each of the eight years wouldbe required. If debt financed, the interest rate would be 14 percent anddebt payments would be due at the beginning of each of the eight years.(Interest would be amortized as a mortgage-type of debt instrument.) Thecompany is in the 40 percent tax bracket. Which method of financing hasthe lower present value of cash outflows?

The question is based on the concept of capital budgeting techniques to select the most appropriate…

Answered: CBC Ltd. wishes to acquire a K100,000…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A commercial property is available for a price of £25.5 million and a developer is interested in purchasing it in order to turn it into a rental property. The developer estimates that the total refurbishments costs will amount to £3.1 million, which will be incurred exactly three months after purchase. A potential tenant company has agreed to occupy and rent out the property six months after the date of purchase. The lease agreement states that the company will rent the office block for 15 years and will then purchase the property at the end of the rental period for £28 million. It is further agreed that rents will be paid quarterly in arrears and will be increased every 3 years at the rate of 3.5% per annum compound. The initial rent has been set at £2.7 million per annum with the first rental payment is due exactly three months following the date of occupation. Calculate the net present value of the profit from this investment assuming that the developer earns a rate of return of 9%…
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Jack Toronto is the newly recruited financial analyst of Von Mining Company Ltd. He has been asked to analyze a proposal to acquire a drilling machine. He received the appropriation capital request. Von Mining Company can purchase the drilling machine for GH¢ 50,000. Von Mining Company Ltd can also lease the drilling machine for GH¢12,200 a year for a 5-year period from Trosky Leasing Ltd. The expected life of the machine is given as 5 years and expected to have a salvage value of GH¢5000 in 5 years’ time. The mining company intends to buy the drilling machine a fair market value at that time. If the mining company decides to buy the machine, it can acquire financing at 20%. It will cost the Mining Company GH¢6,000 in maintenance and insurance of the drilling machine. The tax rate is 34%. Assume depreciation is on straight line basis and lease rentals are tax deductible. (Assume payment is made at the end of the year) Required: a). Calculate NPV to Von Mining Company Ltd of the lease…
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