A firm has decided to acquire as asset costing $150,000 that has an expected life 3...

A firm has decided to acquire as asset costing $150,000 that has an expected life 3 years. Straight line depreciation method is to be applied without residual value. The asset can be purchsed by borrowing or it can be leased. If leasing is used, the lessor requires 10% return, where payment to be made semi-annually at the beginning of each period. If loan, the cost of borrowing is 8% and the loan will be paid semi-annually.

If tax rate is 40% which alternative (lease or purchase) would you recommend?

Expert Solution

Leased amount Residual Value Annual Interest Rate Term

150000 0 10%(Compounded Once a year) 6 Periods(2 payments per year)

If Lease option is preferred,the following is the repayment schedule:

Period	Payment	Principal	Interest	Balance
1	$29,440.14	$22,118.81	$7,321.33	$127,881.19
2	$29,440.14	$23,198.41	$6,241.73	$104,682.78
3	$29,440.14	$24,330.69	$5,109.45	$80,352.08
4	$29,440.14	$25,518.25	$3,921.89	$54,833.84
5	$29,440.14	$26,763.76	$2,676.38	$28,070.07
6	$29,440.14	$28,070.07	$1,370.07	$0.00

Loan amount Annual Interest Rate Term

150000 8%(Compounded Once a year) 6 Periods(2 payments per year)

If Loan option is preferred the following is the repayment schedule:

*Period*	*Payment*	*Principal*	*Interest*	*Balance*
1	$28,542.64	$22,658.07	$5,884.57	$127,341.93
2	$28,542.64	$23,546.96	$4,995.69	$
3	$28,542.64	$24,470.72	$4,071.93	$79,32
4	$28,542.64	$25,430.71	$3,111.93	$53,893.54
5	$28,542.64	$26,430.71	$2,114.27	$27,465.17
6	$28,542.64	$27,465.17	$1,077.47	$0.00

Lease option Outflows : $29,440.14 * 6 = $176640.84

Loan option Outflows : $28,542.64 * 6 = $171255.84

As Outflows from loan option is less,Borrowing a loan is suggested.

ekkarill92 answered 1 year ago

The Lavish Carpet Manufacturing Co. has decided acquire a new machine that has an economic life...

The Lavish Carpet Manufacturing Co. has decided acquire a new machine that has an economic life of 10 years, with no residual value. The machine can be purchased for $75,000, and the supplier is willing to advance $45,000 of the purchase price at 12 percent. The loan is to be repaid in equal instalments over 10 years. Lavish Carpet pays 40 percent corporate income tax and can claim 20 percent capital cost allowances on the purchased asset. It expects to...

Worldwide Inc., a large conglomerate, has decided to acquire another firm. Analysts are forecasting a period...

Worldwide Inc., a large conglomerate, has decided to acquire another firm. Analysts are forecasting a period (2 years) of extraordinary growth (15 percent), followed by another 2 years of unusual growth (10 percent), and finally a normal (sustainable) growth rate of 6 percent annually. If the last dividend was D0 = $1.00 per share and the required return is 8 percent, what should the market price be today

Question: An asset has a useful life of 3 years. cost of the asset is $2000....

Question: An asset has a useful life of 3 years. cost of the asset is $2000. Residual value is $500. the asset can be used for a total of 1500 hours. it is used for 650 hours in the first year of operations and for 600 hours in the second year. Depreciation expense for the three years will be as follows: Calculate annual depreciation for the first and second year of the operations using (1) straight-line method (2) Units of...

The proposal is for a plant costing $250,000. The plant has an expected useful life of...

The proposal is for a plant costing $250,000. The plant has an expected useful life of 25 years and a set salvage value of $45,000. Annual receipts of $41,000 are expected, annual maintenance taxes, and administrative cost will be $11,000/year. What is the present worth if MARR is 10%? A. $28,345 B. $15,515 C. $32,705 D. $26,465 PLEASE SOLVE IN EXCEL WITH EXCEL EQUATIONS

An asset was purchased on January 1, 2020 for $150,000. The estimated useful life is 5...

An asset was purchased on January 1, 2020 for $150,000. The estimated useful life is 5 years and 31,250 units. With the residual value being $25,000 prepare a schedule of depreciation for each of the Straight-line method, Double Declining Method and the Units of Production method. The units to be produced are as follows: Year 1 5,000 units, Year 2 4,000 units, Year 3 6,000 units, Year 4 10,000 units and Year 5 12,000 units. What is the depreciation expense...

Sauer Food Company has decided to buy a new computer system with an expected life of...

Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $380,000. The company can borrow $380,000 for three years at 12 percent annual interest or for one year at 10 percent annual interest. Assume interest is paid in full at the end of each year. a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized...

The management of a firm determine that they need to acquire additional equipment costing $10,000,000. The...

The management of a firm determine that they need to acquire additional equipment costing $10,000,000. The firm’s current B/S is below (in thousands). Assets Liabilities Cash $2,000 Accounts Payable $5,000 Accounts Receivable 3,000 Salary Payable 10,000 Supplies 2,000 Current Liabilities 15,000 Prepaid Rent 2,000 Long-term Note 12,000 Current Assets 9,000 Total Liabilities 27,000 Equipment 25,000 Equity Less A/D (5,000) Contributed Capital 5,000 Building 10,000 Retained Earnings 6,000 Less A/D (1,000) Total Equity 11,000 Long-term Assets 29,000 Total Assets $38,000 Liabilities...

Asset A has expected return of 16% and variance of 12.98%. Asset B has an expected...

Asset A has expected return of 16% and variance of 12.98%. Asset B has an expected return of 8%, and a variance of 5.29%. The correlation coefficient between the two assets is 0.6. Portfolio X is composed 50% of portfolio A and 50% of portfolio B. Variance of portfolio X is? Answer percent.

Sirius has decided to acquire a new equipment at a cost of $748,000. The equipment has...

Sirius has decided to acquire a new equipment at a cost of $748,000. The equipment has an expected life of 6 years and will be depreciated using 5-year MACRS with rates of .20, .32, .192, .1152, .1152, and .0576 (note that 5-year MACRS depreciation actually takes place over 6 years). There is no actual salvage value. Travis Capital has offered to lease the equipment to Sirius for $153,000 a year for 6 years, with lease payment at the end of...

A cash-strapped firm would like to acquire a capital asset to use for the next fifteen...

A cash-strapped firm would like to acquire a capital asset to use for the next fifteen years. It can purchase the asset, which costs $50M, by taking out a fifteen-year balloon loan at 5.8% annual interest rate. The firm plans to sell the asset at book value for $15M at the end of the fifteen-year period. Alternatively, the firm can lease the asset from the manufacturer for $4.75M a year. It is agreed, after negotiating, that the lessor would be...

Question