The loan payment (principal plus interest) is $4,475 per year. The present value interest factor for a 5-year annuity at 15%: $15,000 / 3.3522. The $5,000 salvage value is a reduction to the cost of owning and results in an after tax cost of owning the equipment of $5,197. EXERCISE 14: PURCHASE VERSUS LEASE CALCULATION 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 1 $4,500 3,150 2,205 1,543 1,081 3 4 5

The loan payment (principal plus interest) is $4,475 per year. The present value interest factor for a 5-year annuity at 15%: $15,000 / 3.3522. The $5,000 salvage value is a reduction to the cost of owning and results in an after tax cost of owning the equipment of $5,197. EXERCISE 14: PURCHASE VERSUS LEASE CALCULATION 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 1 $4,500 3,150 2,205 1,543 1,081 3 4 5

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter19: Lease Financing

Section: Chapter Questions

Problem 2P: Lease versus Buy Consider the data in Problem 19-1. Assume that RCs tax rate is 40% and that the...

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Lease versus Buy Consider the data in Problem 19-1. Assume that RCs tax rate is 40% and that the equipments depreciation would be 100 per year. If the company leased the asset on a 2-year lease, the payment would be 110 at the beginning of each year. If RC borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should RC lease or buy the equipment?
BLCK PNK is deciding to purchase or lease an automatic casting machine that will cost 15000, to be depreciated straight-line basis over a 5-year period. tax=50%. actual expected salvage value is 2100. maintenance & insurance expenses= 1000. todd co can borrow funds at before-tax rate of 8%. lease details: lease payment = 4200 required: (39)PV of cost of owning, (40)PV of cost of leasing, NAL, and decision
Written report with the following content: • Appendix1: Leasing Explain the calculations. Your recommendations Objective: Should FFT lease or construct their own production facility Option 1: Construct Costs to incur: Buying land, construct building and getting ready for use (FFT has these funds available in their bank account today so no mortgage is needed) $ 1,200,000 Taxes, insurance, and repairs (per year) $110,000 Intended years of use 15 Projected market value in 15 years $ 1,250,000 Option 2: Lease Intended years of use 15 Deposit required today (this deposit will be returned to FFT when the lease contract is complete is 15 years) $ 100,000 Annual lease payment $ 160,000 Property taxes (annual) to be paid by FFT $ 15,000 Insurance (annual) to be paid by FFT $ 15,000 Required rate of return 8% Methodology: The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or construction. Based on the analysis, they will recommend the preferred option…
Lawrence Corp. is considering the purchase of a new piece of equipment. When discourtaed at a hurde rete l te project hant etw of $24,58O, When discounted at a hurdie rate of 10%, the project has a net present value of ($28340), The intemal rate of retum d te pis Multiple Choice zero. between zero and 8% between 8% and 10% greater than 10% Next> 18 of 20 # ( Prev lulook Air
A company is considering two alternatives with regards to equipment which it needs. The alternatives are as follows: Alternative A:PurchaseCost of Equipment 700,581Salvage Value 105,896Daily operating cost 534Economic life, years 10 Alternative B: Rental at 1,539 per day. At 18% interest, how many days per year must the equipment be in use if Alternative A is to be chosen.
An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $11 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $11 PSF in (a) is too low and wants to raise that amount to $15 with the same $1 step-ups. However, now ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (Tls). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $14 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $6 PSF for 20,000 SF per year. If ATRIUM…
An owner of the ATRIUM Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $10 per square foot (PSF) with step-ups of $1 per year beginning one year from now. Required: a. What is the present value of cash flows to ATRIUM under the above lease terms? (Assume a 10% discount rate.) b. The owner of ATRIUM believes that base rent of $10 PSF in (a) is too low and wants to raise that amount to $14 with the same $1 step-ups. However, now ATRIUM would provide ACME a $52,800 moving allowance and $128,000 in tenant improvements (TIs). What would be the present value of this alternative to ATRIUM? c. ACME informs ATRIUM that it is willing to consider a $13 PSF with the $1 annual stepups. However, under this proposal, ACME would require ATRIUM to buyout the one year remaining on its existing lease in another building. That lease is $5 PSF for 20,000 SF per year. If…
Assume you can lease an item you need for a project for GH¢950/day. To purchase the item, thecost is GH¢13,000 plus a daily operational cost of GH¢ 300/day.a. How long will it take for the purchase cost to be the same as the lease cost? Critically discuss the appropriate make or buy decisions to be made in case the item will beused for; i. ii. iii. At most 15 daysMore 15 days but not exceeding 20 daysAt least 20 days
leasing new equipment. The lease terms include five aritual payments of $4,800 with the first at the would cost to buy and would 8 be depreciated straight line to a zero salvage value over 5 years. The firm can borow at a rate of 5.5 percent and has a tax rate of 21 percent. What is the cash flow from leasing relative to purchasing in Year of 40 Mutiple Choice O O O O $21700 $16.353 $30.145 $20.700 $25.500
Heidi Inc is considering whether to lease or purchase a piece of equpnenit. The total cost to lease the equoment will be $120.000 ove s estimated We while the totel cost to buy the equipment will be $75,000 over s estimated We At Heidrequired ae oturr the nirt preses value of the cost uf leasing the equipment is $73.700 and the net present value of the cost of buying the equipment li $68,000. Bosed on financiel factors, Heidi should Muple Choice lease the equipment, saving $45,000 over buyingh buy the equipment saving $45,000 over leasing lease the equipment, saving $5,700 over buying buy the equipment, saving $5.700 over leasing
Lease versus purchase Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease The leasing arrangement requires end-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Purchase If the firm purchases the machine, its cost of $80,000 will be financed with a 5-year, 14% loan requiring equal end-of-year payments of $23,302. The machine will be depreciated under MACRS using a 5-year recovery period. (See Table 2 for the applicable depreciation percentages.) The firm will pay $2,000 per year for a service contract that covers all maintenance costs; insurance and other…
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