Nikul Nodhead College needs a new computer. It can either buy it for $350,000 or lease it from Compulease. The lease terms requireNodhead to make six annual payments (prepaid) of $82,000. Nodhead pays no tax. Compulease pays tax at 35%. Compulease candepreciate the computer for tax purposes straight-line over five years. The computer will have no residual value at the end of year 5.The interest rate is 8%.a. What is the NPV of the lease for Nodhead College?Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer tothe nearest whole number.b. What is the NPV for Compulease?Note: Do not round intermediate calculations. Round your answer to the nearest whole number.c. What is the overall gain from leasing?Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer tothe nearest whole number.a. Net present valueb. Net present valuec. Overall gain$ (59,402)

The problem presented involves a leasing scenario where Nodhead College has the option to either…

Answered: Nodhead College needs a new computer.…

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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Nodhead College needs a new computer. It can either buy it for $250,000 or lease it from Compulease. The lease terms require Nodhead to make 6 annual payments (prepaid) of $58,000. Nodhead pays no tax. Compulease pays tax at 30%. Compulease can depreciate the computer for tax purposes at a CCA rate of 25%, and will close the asset pool at the end of the sixth year. The first CCA tax saving is available in year 0. The computer will have no residual value at the end of year 5. The interest rate is 9%. a. What is the NPV of the lease for Nodhead College? (Round your answer to the nearest dollar. Use minus sign to enter negative NPV, if any.) NPV$ b. What is the NPV for Compulease? (Round your answer to the nearest dollar. Use minus sign to enter negative NPV, if any.) NPV$ c. What is the overall gain from leasing? (Round your answer to the nearest dollar. Use minus sign to enter loss, if any.) Overall gain (loss)
Big Sky Hospital plans to obtain a new MRI that costs $1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI or it can lease the equipment. Assume that the following facts apply to the decision: - The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45,0.15, and 0.07 in Years 1 through 4, respectively. - Estimated maintenance expenses are $75,000 payable at the beginning of each year whether the MRI is leased or purchased. - Big Sky's marginal tax rate is 40 percent. - Big Sky's cost of debt is 15 percent. - If leased, the lease (rental) payments would be $400,000 payable at the end of each of the next four years. - The estimated residual (and salvage) value is $250,000. What is the IRR of the lease
Startle Corporation wants to purchase a new production machine. They currently have an old machine, which is operable for five more years and is expected to have a zero-disposal value at the end of five years. If the company buys the new machine, the old machine will be sold now for $65,000 (book value is $73,000). The new machine will cost $600,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new machine will not have a salvage value and will not be sold after its useful life. An additional cash investment in working capital of $50,000 will be required if the new machine is purchased. The investment is expected to generate $75,000 in before tax cash net inflows during the first year of operation. The expected before tax cash net inflow for years two through five is $220,000 each year. These cash flows do not include depreciation and are recognized at the end of each year. The working capital investment will not be recovered at…
Trestle Corporation wants to purchase a new finishing machine. They currently have an old machine, which is operable for five more years and is expected to have a zero-disposal value at the end of five years. If the company buys the new machine, the old machine will be sold now for $95,000 (book value is $75,000). The new machine will cost $635,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new machine will not have a salvage value and will not be sold after its useful life. An additional cash investment in working capital of $25,000 will be required if the new machine is purchased. The investment is expected to net $80,000 in before tax cash inflows during the first year of operation and $235,000 each additional year of use. These cash flows do not include depreciation and are recognized at the end of each year. The working capital investment will not be recovered at the end of the asset's life. The company's tax rate is 32%.
← Your company has purchased equipment (for $50.000) that will redoce materials and labor costs by $12,000 each year for N years. After N years, there will be no further need for the machine, and because the machine is specially designed, it will have no MV at any time. The RS, however, has ruled that you must depreciate the equipment on a SL basis with a tax life of five years. If the effective income tax rate is 35%, what is the minimum number of years your fem must operate the equipment to earn 10% per year after taxes on its investment? Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year Your firm must operate the equipment for minimum years to earn 10% per year after taxes on its investment (Round your answer up to the nearest whole number)
Your company has purchased equipment (for $50,000) that will reduce materials and labor costs by $14,000 each year for N years. After N years, there will be no further need for the machine, and because the machine is specially designed, it will have no MV at any time. The IRS, however, has ruled that you must depreciate the equipment on a SL basis with a tax life of five years. If the effective income tax rate is 20%, what is the minimum number of years your firm must operate the equipment to earn 10% per year after taxes on its investment?
McPherson Company must purchase a new milling machine. The purchase price is $50,000, including installation. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4? Depreciation Rate Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 a. $10,900 b. $9,837 c. $8,878 d. $9,345 e. $10,335 0.20 0.32 0.19 0.12 0.11 0.06
Pink Petunias, a wholesale nursery, is considering purchasing a new plot of land for their business for $300,000. The land would allow Pink Petunias to increase their pre-tax cash flows by $90,000 each year. The company would plan to keep the land for 20 years before selling it for $300,000. Because the land is real property, the company would not take any related depreciation. Pink Petunias' tax rate is 25%, and the required rate of return is 9%. What is the Cash Payback Period of the proposed investment? Select one: O C O O a. 20 years b. 3.33 years c. 4.44 years d. None of the above
The Safety Razor Company has a large tax-loss carry-forward and does not expect to pay taxes for another 10 years. The company is therefore proposing to lease $110,000 of new machinery. The lease terms consist of 7 equal lease payments prepaid annually. The lessor will take CCA on the machinery at a 30% rate and the pool will never close. The first CCA tax deduction is assumed to occur at the end of the first year. There is no salvage value at the end of the machinery's economic life. The tax rate is 35%,and the rate of interest is 11%. Wilbur Occam, the president of Safety Razor, wants to know the minimum lease payment that the lessor is likely to accept. (Do not round intermediate calculations. Round your answer to the nearest whole dollar.) The minimum lease payment
Builtrite is considering purchasing a new machine that would cost $60,000 and the machine would be depreciated (straight line) down to $0 over its five year life. At the end of five years it is believed that the machine could be sold for $15,000. The machine would increase EBDT by $42,000 annually. Builtrite’s marginal tax rate is 34%. What is the TCF associated with the purchase of this machine? $5,100 $7,500 $0 $9,900
Your firm needs a computerized machine tool lathe which costs $50,000 and requires $12,000 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category, and neither bonus depreciation nor Section 179 expensing can be used. Assume a tax rate of 21 percent and a discount rate of 12 percent. nts Calculate the depreciation tax shield for this project in year 3. (Round your answer to 2 decimal places.) Print Depreciation tax shield eferences 00
Mergeron Industries purchases a new delivery van. The van costs $32,000 and is expected to last 5 years. The company uses straight-line depreciation for accounting purposes. The residual value is expected to be $2,000. The summary rate is 30%. Calculate the deferred tax liability for year one ignoring the half year rule.(place answer in the space below without a $ sign)

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