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 cost of the two alternatives. If the objective is to minimize the present value of aftertax costs, which alternative should be selected? Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating leasearrangement. If it purchases the asset, the cost will be $48,000. It can borrow funds for four years at 11 percent interest. The asset willqualify 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 $15,000 for the first two years and the other with paymentsof $18,500 for the last two years. The leases would be treated as operating leases.a. Compute the aftertax cost of the lease for the four years. (Negative answers should be indicated by a minus sign. Round the finalanswers to nearest whole doller.)YearAftertaxcost01515000975013250120256475b. Compute the annual payment for the loan. Use Appendix D. (Round the final answer to nearest whole dollar)Annual payment15474c. Compute the amortization schedule for the loan. (Do not round intermediate calculations. Round the final answers to the nearestwhole dollar.)YearBeginningBalanceAnnualPaymentsAnnualInterestRepayment onPrincipalEndingBalance

The objective of the question is to compare the after-tax cost of leasing an asset versus purchasing…

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 $48,000. It can borrow funds for four years at 11 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 $15,000 for the first two years and the other with payments of $18,500 for the last two years. The leases would be treated as operating leases. a. Compute the aftertax cost of the lease for the four years. (Negative answers should be indicated by a minus sign. Round the final answers to nearest whole doller.) Year Aftertax cost 0 1 5 15000 9750 13250 12025 6475 b. Compute the annual payment for the loan. Use Appendix D. (Round the final answer to nearest whole dollar) Annual payment 15474 c. Compute the amortization schedule for the loan. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.) Year Beginning Balance Annual Payments Annual Interest Repayment on Principal Ending Balance

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 $48,000. It can borrow funds for four years at 11 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 $15,000 for the first two years and the other with payments of $18,500 for the last two years. The leases would be treated as operating leases. a. Compute the aftertax cost of the lease for the four years. (Negative answers should be indicated by a minus sign. Round the final answers to nearest whole doller.) Year Aftertax cost 0 1 5 15000 9750 13250 12025 6475 b. Compute the annual payment for the loan. Use Appendix D. (Round the final answer to nearest whole dollar) Annual payment 15474 c. Compute the amortization schedule for the loan. (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.) Year Beginning Balance Annual Payments Annual Interest Repayment on Principal Ending Balance

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

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.
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.
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…
Dunbar Corporation can purchase an asset for $40,000; the asset will be worthless after 14 years. Alternatively, it could lease the asset for 14 years with an annual lease payment of $3,841 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? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest cent. $
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?
Hull Manufacturing Co. must decide whether to purchase or lease a new piece of equipment. The equipment can be leased for $4,000 a year or purchased for $15,000. The lease includes maintenance and service. The salvage value of the equipment at the end of five years is $5,000. If the equipment is owned, service and maintenance charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing would you choose? Use the following capital cost allowance amounts. Year Amount $4,500 3,150 2,205 1,543 1,081 2 3 4
Firm A is considering leasing equipment. The equipment will provide $2.8 million in annual pre-tax cost savings. The cost of leasing is $8.78 million and the equipment will be depreciated straight-line to zero over five years. Assume a tax rate of 21% and a borrowing rate of 7%. Firm B has offered to lease this equipment for payments of $1.95 million per year. Assume that payments for the lease are made at the start of the year. i) What is the maximum lease payment that would be acceptable to Firm A? ii) Suppose now Firm B requires Firm A to pay a $600,000 security deposit at the inception of the lease, and this amount is refunded at the end of the lease. If the lease payment is still $1.95 million. Is it advantageous for Firm A to lease the equipment now?
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
Company C is considering a leasing arrangement for an asset that has no value after its use for 3 years. It can borrow the value of the asset, at a 3-year simple interest loan of 10% with payments at the end of the year and buy the asset, or the company can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), if the firm's tax rate is 25%? (round to the nearest integer)(The Depreciation rate is 33.33% for Year 1, 33.33% for Year 2, and 33.33% for Year 3. The value of the asset $4,800,000)
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…
. 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?