Problem 21-11 Deposits in LeasingThe Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that itmust use the system to stay competitive; it will provide $2.6 million in annual pretax costsavings. The system costs $7.7 million and will be depreciated straight-line to zero overits five-year life, after which it will be worthless. Wildcat's tax rate is 21 percent and thefirm can borrow at 6 percent. Lambert Leasing Company has offered to lease the drillingequipment to Wildcat for payments of $1,660,000 per year. Lambert's policy is to requireits lessees to make payments at the start of the year. Suppose Lambert requires Wildcatto pay a $790,000 security deposit at the inception of the lease. Calculate the NAL withthe security deposit. (Do not round intermediate calculations and enter your answer indollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)NAL

Certainly! Let's break down the calculations and explain each step in detail.**1. Annual Tax Shield…

Answered: Problem 21-11 Deposits in Leasing The…

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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Exercise 12-2 (Algo) Net Present Value Analysis [LO12-2] The management of Kunkel Company is considering the purchase of a $26,000 machine that would reduce operating costs by $6,500 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 16%. Click here to view Exhibit 128-1 and Exhibit 128-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the net present value of the investment in the machine. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount. Use the appropriate table to determine the discount factor(s).) Net present value…
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Problem 7-2 Scenario Analysis We are evaluating a project that costs $520,000, has a life of 6 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 73,000 units per year. Price per unit is $45, variable cost per unit is $30, and fixed costs are $840,000 per year. The tax rate is 21 percent, and we require a return of 15 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Best-case NPV Worst-case NPV
Brief Exercise 12-9 Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $123,465 and will increase annual expenses by $67,000 including depreciation. The oil well will cost $481,000 and will have a $10,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13%.) Annual rate of return % Click if you would like to Show Work for this question: Open Show Work
Exercise 10-12A (Algo) Determining the payback period LO 10-4 Fanning Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $14,800,000; It will enable the company to Increase its annual cash Inflow by $3,700,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $34,800,000; It will enable the company to increase annual cash flow by $5,800,000 per year. This plane has an eight-year useful life and a zero salvage value. Required *1. Determine the payback period for each Investment alternative. a2. Identify the alternative Fanning should accept if the decision is based on the payback approach. Note: Round your answers to 1 decimal place. a-1. Alternative 1 (First plane) a-1. Alternative 2 (Second plane) a-2. Fanning should accept Payback Period years years
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Problem 22-15 Management of Braden Boats, Inc. is considering an expansion in the firm's product line that requires the purchase of an additional $160,000 in equipment with installation costs of $15,000 and removal expenses of $4,500 (Note: the removal expenses are considered terminal cash flows and not associated with the installation of the new equipment). The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciation and taxes as follows: Years 1 and 2 $64,000 Years 3 and 4 $51,000 The firm's income tax rate is 30 percent and the weighted-average cost of capital is 6 percent. Based on the net present value method of capital budgeting, should management undertake this project? Use Appendix B to answer the question. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar NPV: $ The firm -Select- Year 5 $50,000 make the investment.
Problem 7-2 Scenario Analysis We are evaluating a project that costs $1,080,000, has a life of 10 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 52,000 units per year. Price per unit is $50, variable cost per unit is $30, and fixed costs are $730,000 per year. The tax rate is 25 percent, and we require à return of 15 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Best-case NPV Worst-case NPV
Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $205,000. If it is purchased, Dungan will incur costs of $5,200 to remove the present equipment and revamp its facilities. This $5,200 is tax deductible at time 0. Depreciation for tax purposes will be allowed as follows: year 1, $42,000; year 2, $72,000; and in each of years 3 through 5, $32,000 per year. The existing equipment has a book and tax value of $102,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $42,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life. Management has provided you with the following comparative manufacturing cost data. Annual capacity (units) Annual costs: Labor Depreciation Other (all cash) Total annual costs. New Present Equipment Equipment 402,000…
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