A company is considering the purchase of some equipment. The equipment costs $1,600,000. It lasts for...

A company is considering the purchase of some equipment. The equipment costs $1,600,000. It lasts for 4 years, and would be depreciated straight line to a zero salvage value. Alternatively, the company could lease the equipment for 4 years. The leasing contract would include maintenance, and the lease payments would be due at the end of each of the four years. The company’s before-tax cost of debt is 10%. The tax rate is 40%. What is the breakeven lease payment per year that would make the company indifferent between buying, and leasing the equipment?

Please show the calculations. Thank you.

Solutions

Expert Solution

jeff jeffy answered 3 days ago

Next > < Previous

Related Solutions

Orange Company is considering the purchase of some equipment. The initial investment will be $42,000. The...

Orange Company is considering the purchase of some equipment. The initial investment will be $42,000. The estimated useful life of the equipment will be 5 years, at which point it will have a zero salvage value. The annual savings in cash operating costs will equal $12,500, and the company has a minimum required rate of return of 12 percent. Use straight-line depreciation, and ignore income taxes. Compute (Show all calculations): Net present value Internal rate of return Payback period Accounting...

FITCO is considering the purchase of new equipment. The equipment costs $337000, and an additional $114000...

FITCO is considering the purchase of new equipment. The equipment costs $337000, and an additional $114000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $260000, and it will have annual cash operating expenses of $85000. The equipment will be sold for $85000 after 5 years. An inventory investment of $71000 is required during the life of the investment. FITCO is in the 40...

FITCO is considering the purchase of new equipment. The equipment costs $354000, and an additional $104000...

FITCO is considering the purchase of new equipment. The equipment costs $354000, and an additional $104000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $266000, and it will have annual cash operating expenses of $82000. The equipment will be sold for $84000 after 5 years. An inventory investment of $71000 is required during the life of the investment. FITCO is in the 40...

BITFIT is considering the purchase of new equipment. The equipment costs $360,000, and an additional $120,000...

BITFIT is considering the purchase of new equipment. The equipment costs $360,000, and an additional $120,000 is needed to install it. The equipment will be depreciated straight-line to zero over a 6-year life. The equipment will generate additional annual revenues of $265,000, and it will have annual cash operating expenses of $80,000. The equipment will be sold for $75,000 after 6 years. An inventory investment of $73,000 is required during the life of the investment and will be recovered by...

A company is considering whether to lease or purchase some specialized equipment. The capital budgeting analysis...

A company is considering whether to lease or purchase some specialized equipment. The capital budgeting analysis indicating the equipment should be secured already has not been completed. The equipment has a five-year economic and tax life, and the company uses a straight-line depreciation method. The equipment costs $1,000,000 if purchased or it can be leased for five-years at $280,000 per year. The first lease payment is payable in advance. The equipment’s salvage value is estimated to be $100,000. Revenue is...

Clare Company is considering the purchase of some labor saving equipment for its packaging department. The...

Clare Company is considering the purchase of some labor saving equipment for its packaging department. The equipment is expected to result in labor cost savings of $50,000 per year for the expected five-year life of the equipment. The cost of the equipment is $120,000 and the desired rate of return is 6%. 1. The NPV of the investment for Clare Company is ___________. Is the IRR greater than, equal to or less than the desired rate of return? 2. What...

A hospital is considering the purchase of a piece of medical equipment that costs $1,500,000 and...

A hospital is considering the purchase of a piece of medical equipment that costs $1,500,000 and has a useful life of five years and no salvage value at the end of its useful life. The equipment generates revenues of $650,000 per year and operating expenses of $300,000. Calculate NPV, payback, BCR, and IRR, should the equipment be purchased if the discount rate is 6% or 10%? Revenue Expense Year 0 - $1,500,000 (investment) ...

A company is considering purchasing new equipment. The purchase of the equipment is expected to...

A company is considering purchasing new equipment. The purchase of the equipment is expected to generate after tax savings of $12,600 each year for 8 years. The company can borrow money at 6%. Assume annual compounding. Determine the present value of the future cash inflows. Hint: the $12,600 are your annuity payments

Carnival Company is considering leasing a new equipment. The lease lasts for 8 years. The lease...

Carnival Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 10 payments of $9,000 per year with the first payment occurring immediately. The equipment would cost $60,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual pre-tax salvage value is $4,000. The firm can borrow at a rate of 6%. The corporate tax rate is 25%. What would the NPV of the lease relative...

The management of Electronics Company is considering to purchase an equipment to be attached with the...

The management of Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost $8,000. The useful life of the equipment is 4 years. Management projected that annual cash inflow for four(4) years as follow: year-1 $1,000, year-2 $3000, year-3 $3500 and year-4 $4000. There’s maintenance cost for the equipment, and management should expense: $600 on year-2 and $800 on year-4. The management wants a 14% return on all investments. a....

Subjects