Question
In: Finance
A firm is considering whether to lease or buy a machine that costs $100,000. The machine...
A firm is considering whether to lease or buy a machine that costs $100,000. The machine would be kept for three years. The firm’s cost of debt is 10% and its tax rate is 40%. If the machine is owned then the company would have to pay $10,000 per year in maintenance cost (payable at the end of the year). If the machine is leased then the maintenance will be taken care of by the lessor. If leased, the lease payments would be $35,000 at time zero and at the end of each of the next three years. Assume straight-line to a salvage value of $0 three years from now.
What is the net advantage to leasing if any?
Solutions
Expert Solution
| NAL | $866.75 |
| Lease | BUY | ||||
| Year | Cash flows after tax | Cost | Tax shield | Maintenance | Net Cash flow |
| 0 | -21000 | -100000 | -100000 | ||
| 1 | -21000 | 13333.33 | -6000 | 7333.333333 | |
| 2 | -21000 | 13333.33 | -6000 | 7333.333333 | |
| 3 | -21000 | 13333.33 | -6000 | 7333.333333 | |
| After tax cost | 0.06 | ||||
| NPV of lease | ($77,133.25) | NPV of buy | ($78,000.00) | ||
| NAL | $866.75 | ||||
Workings
jeff jeffy answered 5 months agoRelated Solutions
A contractor is considering whether to buy or lease a new machine for her layout site...
A contractor is considering whether to buy or lease a new
machine for her layout site work. Buying a new machine will cost
$12,000 with a salvage value of $1200 after the machine's useful
life of 8 years. On the other hand, leasing requires an annual
lease payment of $3000, which occurs at the state of each year. The
MARR is 15%. On the basis of an internal rate of return analysis,
which alternative sgould the contractor be advised to...
A firm is considering replacing an old machine with another. The new machine costs $100,000 plus...
A firm is considering replacing an old machine with another.
The
new machine costs $100,000 plus $10,000 to install. Assume a 30
percent ordinary tax rate. The asset was
purchased for $80,000 3 years ago and has a book value
(undepreciated value) of $20,000.
(a) The asset is sold for $50,000.
(b) The asset is sold for $30,000.
(c) The asset is sold for $20,000,
(d) The asset is sold for $5,000. For each case given, calculate
the initial investment...
Freedom Ltd is considering whether to lease or buy an advanced machine for its new product....
Freedom Ltd is considering whether to lease or buy an advanced
machine for its new product. The following information is available
for this decision: Buy: The purchase price of the machine is $4.85
million. The machine will be depreciated using straight-line method
over 4 years with a zero salvage value. Lease: The annual lease
payments will be $1.1 million, payable at the beginning of each of
the four years of the lease. The annual interest rate of secured
debt is...
Freedom Ltd is considering whether to lease or buy an advanced machine for its new product....
Freedom Ltd is considering whether to lease or buy an advanced
machine for its new product. The following information is available
for this decision: Buy: The purchase price of the machine is $4.85
million. The machine will be depreciated using straight-line method
over 4 years with a zero salvage value. Lease: The annual lease
payments will be $1.1 million, payable at the beginning of each of
the four years of the lease. The annual interest rate of secured
debt is...
Freedom Ltd is considering whether to lease or buy an advanced machine for its new product....
Freedom Ltd is considering whether to lease or buy an advanced
machine for its new product. The following information is available
for this decision: Buy: The purchase price of the machine is $4.85
million. The machine will be depreciated using straight-line method
over 4 years with a zero salvage value. Lease: The annual lease
payments will be $1.1 million, payable at the beginning of each of
the four years of the lease. The annual interest rate of secured
debt is...
Freedom Ltd is considering whether to lease or buy an advanced machine for its new product....
Freedom Ltd is considering whether to lease or buy an advanced
machine for its new product. The following information is available
for this decision: Buy: The purchase price of the machine is $4.85
million. The machine will be depreciated using straight-line method
over 4 years with a zero salvage value. Lease: The annual lease
payments will be $1.1 million, payable at the beginning of each of
the four years of the lease. The annual interest rate of secured
debt is...
Question 3 (17 marks) Freedom Ltd is considering whether to lease or buy an advanced machine...
Question 3 Freedom Ltd is considering whether to
lease or buy an advanced machine for its new product. The following
information is available for this decision: Buy: The purchase price
of the machine is $4.85 million. The machine will be depreciated
using straight-line method over 4 years with a zero salvage value.
Lease: The annual lease payments will be $1.1 million, payable at
the beginning of each of the four years of the lease. The annual
interest rate of secured...
You are considering whether to buy or lease a car. If you lease, you have to...
You are considering whether to buy or lease a car.
If you lease, you have to pay a refundable security deposit of
$5 hundred, and a monthly lease payment of $424 for 3 years, with
payments due at the beginning of the month.
If you buy, you will pay a downpayment of $21 hundred, and a
monthly loan payment of $565, over the same period of time, with
payments due at the end of the month. The car is estimated...
A company is considering whether to buy a new machine at a cost of $100,000 or alternatively to lease it for $35,000 p.a. (lease payments payable at the start of each year). Buying it will involve borrowing money at an after tax interest cost of 7% p.a.
A company is considering whether to buy a new machine at a cost of $100,000 or alternatively to lease it for $35,000 p.a. (lease payments payable at the start of each year). Buying it will involve borrowing money at an after tax interest cost of 7% p.a. If the machine is bought, it will be bought on the last day of the current financial year. The machine will be needed for 4 years, and (if purchased) will have a scrap...
A company is considering whether to buy a new machine at a cost of $100,000 or alternatively to lease it for $35,000 p.a. (lease payments payable at the start of each year). Buying it will involve borrowing money at an after tax interest cost of 7% p.a.
A company is considering whether to buy a new machine at a cost of $100,000 or alternatively to lease it for $35,000 p.a. (lease payments payable at the start of each year). Buying it will involve borrowing money at an after tax interest cost of 7% p.a. If the machine is bought, it will be bought on the last day of the current financial year. The machine will be needed for 4 years, and (if purchased) will have a scrap...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Discuss in details the strategic benefits of Business Inelegance systems
- Labradors come in three colors-- black, brown and yellow. What is the genetic basis for these...
- Consider a consumer’s consumption-saving decision in a two-period model. Suppose that the real interest rate is...
- A stone is dropped at t = 0. A second stone, with 6 times the mass...
- What is the VSEPR sketch of PO2-
- A) At a temperature of 27 ?C, what is the speed of longitudinal waves in hydrogen...
- Show by graphing how a change (upward shift or downward shift) in each of the following...
ADVERTISEMENT