Question
In: Finance
cost of machine= 10400000,lease payment = 3050000, you can borrow at 5.2% after taxes, depreciation straight...
cost of machine= 10400000,lease payment = 3050000, you can borrow
at 5.2% after taxes, depreciation straight line over four years ,
tax rate=35% fir the lessee abd 45 for lessor
should i buy or lease?
what is the NPV from lessors viewpoint?
what is the maximum payment and minimum payment?
should you buy or lease if machine is depreciated over 3 years
MACRS(0.3333,0.4445,0.1481,0.0741)
Solutions
Expert Solution
| Cost of Machine | 10400000 |
| life in years | 4 |
| Depreciation per year | 2600000 |
| Lessor point of view | |
| lease rent | 3050000 |
| less: Depreciation | 2600000 |
| EBT | 450000 |
| less: Tax @45% | 202500 |
| EAT | 247500 |
| Add: Depreciation | 2600000 |
| CFAT | 2847500 |
| PFAT for 4years @5.2% | 3.53 |
| TOTAL PV Cashinflows | 10051675 |
| NPV | -348325 |
| MAX & MIN lease payments | ||||||
| Annual installment | 10400000/3.53 | 2946175.637 | ||||
| End of Year | Installment | [email protected]% | Principal | oustanding loan | ||
| 1 | 2946176 | 540800 | 2405376 | 7994624 | ||
| 2 | 2946176 | 415720 | 2530455 | 5464169 | ||
| 3 | 2946176 | 284137 | 2662039 | 2802130 | ||
| 4 | 2946176 | 144046 | 2802130 | 0 | ||
| End of Year | Installment | Tax shield on Int & Dep @35% | Cashflow | PV f @5.2% | Pv of cash flows | |
| 1 | 2946176 | 1099280 | 1846896 | 0.951 | 1756398 | |
| 2 | 2946176 | 1055502 | 1890674 | 0.903 | 1707278 | |
| 3 | 2946176 | 1009448 | 1936728 | 0.859 | 1663649 | |
| 4 | 2946176 | 961580 | 1984596 | 0.816 | 1619430 | |
| Total | 6746755 | |||||
| Max annual after tax flow if installment @ end of year | ||||||
| [email protected]% | 3.53 | |||||
| Annual flow | 6746755/3.53 | 1911262.075 | ||||
| After tax rate | 0.65 | |||||
| Annual lease rent | 1911262/0.65 | 2940403 | ||||
| if installment @begining of year | ||||||
| [email protected]% | 3.713 | |||||
| Annual flow | 6746755/3.713 | 1817063 | ||||
| Annual lease rent | 1817063/0.65 | 2795482 | ||||
| Minimum lease rent will be indiferent lease rent | ||||||
| let R be rent | ||||||
| PV of lease rent | 3.713R | |||||
| PV of after tax benefits | 3.53X0.30R | 1.059R | ||||
| 6746756=3.713R-1.059R | ||||||
| R=2542109 | ||||||
| using MCRS given 4 year rates | ||||||
| Auumed asset depreciated over 4 Years | ||||||
| loan and int remains same | ||||||
| End of Year | Installment | Depreciation | Tax shield on Int & Dep @35% | Cashflow | PV f @5.2% | Pv of cash flows |
| 1 | 2946176 | 3466320 | 1402492 | 1543684 | 0.951 | 1468043 |
| 2 | 2946176 | 3082020 | 1224209 | 1721967 | 0.903 | 1554936 |
| 3 | 2946176 | 1540240 | 638532 | 2307644 | 0.859 | 1982266 |
| 4 | 2946176 | 770640 | 320140 | 2626036 | 0.816 | 2142845 |
| Total | 7148090 | |||||
| Lease rent | 3050000 | |||||
| Year | rent | tax saving | out flow | PVAF | Pv | |
| 1-4 years | 3050000 | 1067500 | 1982500 | 3.53 | 6998225 |
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