Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 27, Problem 2M
The Decision to Lease or Buy at Warf Computers
Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production.
Nick Warf, the company president, has found a vendor for the equipment. Clapton Acoustical Equipment has offered to sell Warf Computers the necessary equipment at a price of $6.1 million. Because of the rapid development of new technology, the equipment falls in the three-year MACRS depreciation class. At the end of four years, the market value of the equipment is expected to be $780,000.
Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four annual payments of $1.48 million due at the beginning of the year. Additionally, Warf Computers must make a security deposit of $400,000 that will be returned when the lease expires. Warf Computers can issue bonds with a yield of 11 percent, and the company has a marginal tax rate of 35 percent.
2. Nick mentions to James Hendrix, the president of Hendrix Leasing, that although the company will need the equipment for four years, he would like a lease contract for two years instead. At the end of the two years, the lease could be renewed. Nick would also like to eliminate the security deposit, but he would be willing to increase the lease payments to $1.775 million for each of the two years. When the lease is renewed in two years, Hendrix would consider the increased lease payments in the first two years when calculating the terms of the renewal. The equipment is expected to have a market value of $3.2 million in two years. What is the NAL of the lease contract under these terms? Why might Nick prefer this lease? What are the potential ethical issues concerning the new lease terms?
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Chapter 27 Solutions
Fundamentals of Corporate Finance
Ch. 27.1 - Prob. 27.1ACQCh. 27.1 - Prob. 27.1BCQCh. 27.1 - What is a sale and leaseback agreement?Ch. 27.2 - Prob. 27.2ACQCh. 27.2 - Prob. 27.2BCQCh. 27.3 - Why is the IRS concerned about leasing?Ch. 27.3 - What are some standards the IRS uses in evaluating...Ch. 27.4 - What are the cash flow consequences of leasing...Ch. 27.4 - Prob. 27.4BCQCh. 27.5 - Prob. 27.5ACQ
Ch. 27.5 - Prob. 27.5BCQCh. 27.6 - Prob. 27.6ACQCh. 27.6 - What paradox does the previous question create?Ch. 27.7 - Prob. 27.7ACQCh. 27.7 - If leasing is tax motivated, who will have the...Ch. 27 - Winston, Inc., is computing the net advantage to...Ch. 27 - Prob. 1CRCTCh. 27 - Leasing and Taxes [LO3] Taxes are an important...Ch. 27 - Prob. 3CRCTCh. 27 - Prob. 4CRCTCh. 27 - Prob. 5CRCTCh. 27 - IRS Criteria [LO1] Discuss the IRS criteria for...Ch. 27 - OffBalance Sheet Financing [LO1] What is meant by...Ch. 27 - Prob. 8CRCTCh. 27 - Prob. 9CRCTCh. 27 - Prob. 10CRCTCh. 27 - Prob. 11CRCTCh. 27 - Prob. 12CRCTCh. 27 - Prob. 1QPCh. 27 - Leasing Cash Flows [LO3] What is the NAL of the...Ch. 27 - Prob. 3QPCh. 27 - Prob. 4QPCh. 27 - Setting the Lease Payment [LO3] In the previous...Ch. 27 - MACRS Depreciation and Leasing [LO3] Rework...Ch. 27 - Lease or Buy [LO3] What is the NAL for Wildcat?...Ch. 27 - Prob. 8QPCh. 27 - Prob. 9QPCh. 27 - Prob. 10QPCh. 27 - Prob. 11QPCh. 27 - Prob. 12QPCh. 27 - The Decision to Lease or Buy at Warf Computers...Ch. 27 - The Decision to Lease or Buy at Warf Computers...Ch. 27 - The Decision to Lease or Buy at Warf Computers...Ch. 27 - Prob. 4M
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