Company ABC Inc has just sold an asset for $2.3 million for the purpose of self-financing...

Company ABC Inc has just sold an asset for $2.3 million for the purpose of self-financing a capital expansion program that may include purchase of a piece of manufacturing equipment for $1.6 million. The company’s tax rate is 25%, its required rate of return is 11%, the estimated salvage or recovery value of the equipment at the end of 3 years is $450,000. Given the high-tech nature of its industry, the conservative approach is to use a depreciable life of 3 years on a straight line basis. The alternative is to lease the same piece of equipment for $425,000 over the same period. Should ABC lease or buy? Show your work to justify your decision or recommendation.

Expert Solution

Lease alternative has higher NPV. Hence lease the asset.

	Lease
Year	Cash flows
0
1	-318750
2	-318750
3	-318750

NPV	($778,934.07)

Buy
Year	Initial cost	Tax shield	Salvage	Net cash flows
0	-1,600,000			-1,600,000
1		133333.3		133,333
2		133333.3		133,333
3		133333.3	337500	470,833

			NPV	($1,027,394.28)

WORKINGS

jeff jeffy answered 1 year ago

ABC corporation has just sold equipment to a French company exports worth FF 80 million with...

ABC corporation has just sold equipment to a French company exports worth FF 80 million with payment due in three months. The spot rate is FF 7.4/$ and the 3 month forward rate is FF 7.5/$. Also assume: 3 month French interest rate 9.00% p.a. 3 month U.S. interest rate 4.00% p.a. 3 month call option on Francs at FF 7.5/$ (strike price) 3.0% premium 3 month put option on Francs at FF 7.5/$ (strike price) 2.4% premium a) How...

ABC Inc. just reported earnings of $35 million. It has adiscount rate of 8% on...

ABC Inc. just reported earnings of $35 million. It has a discount rate of 8% on its stock. Assume its returnon new investment is 12%. The company has 1.5 million shares outstanding. If earnings are expected tohave a perpetual growth rate of 6%, calculate ABC Inc.’s EPS1.A. $24.73B. $23.33C. $25.20D. $26.13E. None of the options

ABC is a company that just bought goods from a french company for 500 million euros...

ABC is a company that just bought goods from a french company for 500 million euros with payment due in 4 months. Assume the following: Spot rate $1.30/euro 4 month forward rate $1.31/euro 4 month french interest rate 8% pa; US 6% pa 4 month call option on euros at a strike price of $1.29/euro with a 3% premium 4 month put option on euros at a strike price of $1.305/euro with a 4% premium Questions: 1, The proceeds of...

Apple Inc. just reported an EPS of $3.30 on revenues of $260,174 million. The company has...

Apple Inc. just reported an EPS of $3.30 on revenues of $260,174 million. The company has 17,100 million shares outstanding. Total assets are $338,516 million, current liabilities equal $105,718 million, and long-term debt is $142,310 million. Net fixed assets are worth $175,697 million. Given this information, which one of the following statements is correct? Apple’s net working capital is $67,101 million. Apple’s total asset turnover is 1.77. Apple’s debt-equity ratio is 2.74. Apple’s current ratio is 3.54.

Guardian Inc. is trying to develop an asset-financing plan. The firm has $510,000 in temporary current...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $510,000 in temporary current assets and $410,000 in permanent current assets. Guardian also has $610,000 in fixed assets. Assume a tax rate of 40 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $410,000 in temporary current...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $410,000 in temporary current assets and $310,000 in permanent current assets. Guardian also has $510,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 70 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $470,000 in temporary current...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $470,000 in temporary current assets and $370,000 in permanent current assets. Guardian also has $570,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $530,000 in temporary current...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $530,000 in temporary current assets and $430,000 in permanent current assets. Guardian also has $630,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 70 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $380,000 in temporary current...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $380,000 in temporary current assets and $280,000 in permanent current assets. Guardian also has $480,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 80 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $340,000 in temporary current...

Guardian Inc. is trying to develop an asset-financing plan. The firm has $340,000 in temporary current assets and $240,000 in permanent current assets. Guardian also has $440,000 in fixed assets. Assume a tax rate of 25 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest...

Question