Cost of BorrowingComey Products has decided to acquire some new equipment having a $180,000 purchase price. The equipment willlast 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333,0.4445, 0.1481, and 0.0741.) The firm can borrow at a 7% rate and pays a 25% federal-plus-state tax rate. Comeyis considering leasing the property but wishes to know the cost of borrowing that it should use when comparingpurchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question?(Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediatecalculations. Round your answer to the nearest dollar.$

The cost of borrowing refers to the expense incurred by an individual or entity when obtaining funds…

Answered: Comey Products has decided to acquire…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 9P

See similar textbooks

Similar questions

Big 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 firms 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. a. What is the cost of owning? b. What is the cost of leasing? c. What is the NAL of the lease?
Grummet Company is acquiring a new wood lathe with a cash purchase price of $80,000. The Wood Master Industries (the manufacturer) has agreed to accept $23,500 at the end of each of the next 4 years. Based on this deal, how much interest will Grummet pay over the life of the loan? A. $94,000 B. $80,000 C. $23,500 D. $14,000
Comey Products has decided to acquire some new equipment having a $220,000 purchase price. The equipment will last four years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 7% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question? Do not round intermediate calculations. Round your answer to the nearest dollar.
Cost of Borrowing Comey Products has decided to acquire some new equipment having a $280,000 purchase price. The equipment will last 4 years and is in the MACRS 3- year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 11% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar. $
Comey Products has decided to acquire some new equipment having a $240,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar.
Comey Products has decided to acquire some new equipment having a $240,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar.Comey Products has decided to acquire some new equipment having a $240,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can…
Comey products has decided to acquire some new equipment having a $200,000 purchase price. The equipment will last 4 years and is in the MARCS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 7% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey's question?
NZ Ltd has decided to install a new item of plant, which will cost $500,000. The following alternative financing arrangements are available: Purchasing finance by borrowing Amount borrowed $500,000 Term of loan 5 years Interest rate 9.7% payable annually Lease plan Amount of finance $500,000 Term 5 years True interest rate 9.1% Annual instalments $128,880 Additional information The tax rate is 28%. Assume that tax benefits arising from deductible expenditures are received in the year of the expenditure. NZ Ltd uses the after-tax borrowing rate as a discount rate. Which financing option should NZ Ltd choose? Show your calculations of the cost of each financing option. Use whole numbers when rounding.
LeaseAfric Ltd. is considering the purchase of a fleet of cars for $337,500.00. It can borrow at 7.5%. The cars will be used for 4 years. The corporate tax rate is 35% and the cars belong in a 30% CCA class. Assuming beginning of period payments and no salvage value, what is the break-even lease payment? a) $102,422.43 b) $96,328.32 c) $110,104.11 d) $91.632.31 e) $101,024.32
AFX Sdn Bhd is trying to decide whether to accept a business loan or a lease financing facility for an equipment purchase. The equipment cost $60,000 with 3-year economic life, depreciated annually based on MACRS 3-year class with the following rates: Year 1 = 33%; Year 2 = 45%; Year 3 = 15%; Year 4 = 7%. If AFX accepts the business loan option, the 3-year loan will attract an interest rate at 12% interest calculated on a yearly reducing balance. AFX would have to maintain the equipment with an annual maintenance fee of $4,000, payable after services have been rendered. Annual insurance premium is $1,400 on cash before cover basis. AFX is planing to sell the equipment after its useful life for $3,000. Should AFX opt for lease financing, the annual lease rental to be paid in advance is $21,000. You also intend to exercise the option to purchase the equipment for $6,000 at the end of the lease period. Your company’s tax rate is 35%. Company’s after-tax cost of debt is 8%. Which…
XYZ Inc. desires to evaluate two plans for acquiring equipment: borrowing to purchase and leasing. Thefirm is in the 40% tax bracket and it’s after tax cost of debt is 7.8%. The equipment costs $32,000 and willhave a 5-year life. It will be depreciated under MACRS using a 5-year recovery period. The total purchaseprice will be financed by a 5-year, 13% loan requiring equal annual end-of-year payments of $9,098. Thefirm will pay $2,350 per year for a service contract that covers all maintenance costs; insurance and othercosts will be borne by the firm. The firm plans to keep the equipment and use it beyond its 5-year recoveryperiod. Alternatively, the firm can lease the equipment under a 5-year lease requiring annual end-of yearpayments of $7,750. All maintenance costs will be paid by the lessor, and insurance and other costs will beborne by the lessee. The lessee will exercise its option to purchase the asset for $2,200 at termination of thelease. For the purchasing plan, calculate the…
BigCo is considering leasing the new equipment that it requires, for $146000 a year, payable in advance. The cost of the equipment is $775000, and will last for 5 years. The expected scrap value at the end of 5th year is $140000. Assume that the equipment will be fully depreciated under straightline method. The tax rate is 35%, the cost of equity is 13% and the cost of debt is 10%. i. What is the net cost of buying? ii. What is the net cost of leasing? iii. What is the net advantage of leasing (NAL)? iv. What is the maximum lease payment that would make BigCo indifferent between leasing or buying?

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

SEE MORE TEXTBOOKS