Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each.

Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter19: Lease Financing

Section: Chapter Questions

Problem 6P: Big Sky Mining Company must install 1.5 million of new machinery in its Nevada mine. It can obtain a...

See similar textbooks

Similar questions

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?
Victory Markets, LLC ("VML") has a bank loan with a total principal of $3,800,000. The stated annual interest rate for the loan is 8.40%, and the loan is to be amortized with monthly payments over 6 years. VML wants the bank to change the provisions of the loan such that payments are made on an annual basis. What would be the economically equivalent annual interest rate (i.e., economically equivalent to 8.40% compounded monthly) for a loan with annual payments? 8.6632% 8.7311% 9.0023% 8.5987%
Next Corporation needs a piece of equipment that costs $270 million. Next can either lease the equipment or borrow $270 million from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that Next’s tax rate is 35% and that the equipment’s depreciation would be $90 million per year. If the company leased the asset on a 3-year lease, the payment would be $105 million at the beginning of each year. If Next borrowed and bought, the bank would charge 12% interest on the loan. In either case, the equipment is worth nothing after 3 years and will be discarded. Should Next lease or buy the equipment? (solve in excel)
The Shakey Company can finance the purchase of a new building costing $2 million with a bond issue, for which it would pay S90,000 interest per year, and then repay the $2 million at the end of the life of the building. Instead of buying in this manner, the company can lease the building by paying $135,000 per year, the first payment being due one year from now. The building would be fully depreciated for tax purposes over an expected life of 20 years. The income tax rate is 40% for all expenses and capital gains or losses, and the firm's after-tax MARR is 6%. Use AW analysis based on equity (nonborrowed) capital to determine whether the firm should borrow and buy or lease if, at the end of 20 years, the building has the following market values for the owner: (a) nothing, (b) S500,000. Straight-line depreciation will be used but is allowable only if the company purchases the building.
The Shakey Company can finance the purchase of a new building costing $2 million with a bond issue, for which it would pay $100,000 interest per year, and then repay the $2 million at the end of the life of the building. Instead of buying in this manner, the company can lease the building by paying $125,000 per year, the first payment being due one year from now. The building would be fully depreciated for tax purposes over an expected life of 20 years. The income tax rate is 40% for all expenses and capital gains or losses, and the firm’s after-tax MARR is 5%. Use AW analysis basedon equity (nonborrowed) capital to determine whether the firm should borrow and buy or lease if, at the end of 20 years, the building has the following market values for the owner: (a) nothing, (b) $500,000. Straight-line depreciation will be used but is allowable only if the company purchases the building.
Your firm needs to borrow $1.0 million for one year. The firm has no other short term borrowings and it's combined state and federal tax rate is 25%. Your banker offers several lending alternatives. Which one will you choose? Select one: A)6.50% simple interest with a 20.00% compensating balance b) . 8.25% simple interest c) . 7.00% simple interest with a 15.00% compensating balance d) . 8.25% discount interest
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.
where a $70,000 loan could be assumed at a 9 percent rate with a remaining term of 15 years and payments of $709.99 per month. Recall that a comparable property with no special financing available would sell for $100,000 and could be financed at a market rate of 11 percent. How much more than $100,000 could the buyer pay if he or she chose to assume the 9 percent loan and still be as well off as if the property were purchased for $100,000 and financed with an 11 percent loan? We first find the present value of the payments that can be assumed using the market rate. This is the market value or cash equivalent value of the assumable loan. It represents the price at which the old loan could be sold to a new lender/investor.
. WellyWeta workshop is considering buying a machine that costs $545,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $140,000. The company can issue bonds at an interest rate of 7 percent. If the corporate tax rate is 21 percent, should the company buy or lease? handwrite please
Consider a firm A that wishes to acquire an equipment. The equipment is expected to reduce costs by $5700 per year. The equipment costs $29000 and has a useful life of 7 years. If the firm buys the equipment, they will depreciate it straight-line to zero over 7 years and dispose of it for nothing. They can lease it for 7 years with an annual lease payment of $8000. If the after-tax interest rate on secured debt issued by company A is 7% and tax rate is 25%, what is the Net Advantage to Leasing (NAL)?(keep two decimal places) Answer: -18233.59
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?
WellyWeta workshop is considering buying a machine that costs $545,000. The machine will bedepreciated over five years by the straight-line method and will be worthless at that time. Thecompany can lease the machine with year-end payments of $140,000. The company can issue bondsat an interest rate of 7 percent. If the corporate tax rate is 21 percent, should the company buy orlease?