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High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available...
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High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $85,000 for five years, due at the beginning of each year. This machine will save Farmer $31,500 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $405,000. This machine will save $34,500 per year in electricity costs. A local bank has offered to finance the machine with a $405,000 loan. The interest rate on the loan will be 6 percent on the remaining balance and will require five annual principal payments of $81,000. Farmer has a target debt-to-asset ratio of 64 percent and a tax rate of 25 percent. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis. |
| a. | What is the NAL of leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. | How much debt is displaced by this lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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jeff jeffy answered 1 year agoRelated Solutions
High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available...
High electricity costs have made Farmer Corporation’s
chicken-plucking machine economically worthless. Only two machines
are available to replace it. The International Plucking Machine
(IPM) model is available only on a lease basis. The lease payments
will be $73,000 for five years, due at the beginning of each year.
This machine will save Farmer $23,000 per year through reductions
in electricity costs. As an alternative, Farmer can purchase a more
energy-efficient machine from Basic Machine Corporation (BMC) for
$370,000. This machine...
High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available...
High electricity costs have made Farmer Corporation’s
chicken-plucking machine economically worthless. Only two machines
are available to replace it. The International Plucking Machine
(IPM) model is available only on a lease basis. The lease payments
will be $83,000 for five years, due at the beginning of each year.
This machine will save Farmer $30,500 per year through reductions
in electricity costs. As an alternative, Farmer can purchase a more
energy-efficient machine from Basic Machine Corporation (BMC) for
$387,000. This machine...
High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available...
High electricity costs have made Farmer Corporation’s
chicken-plucking machine economically worthless. Only two machines
are available to replace it. The International Plucking Machine
(IPM) model is available only on a lease basis. The lease payments
will be $87,000 for five years, due at the beginning of each year.
This machine will save Farmer $32,500 per year through reductions
in electricity costs. As an alternative, Farmer can purchase a more
energy-efficient machine from Basic Machine Corporation (BMC) for
$418,000. This machine...
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A company is contemplating to purchase a machine. Two machines A & B are available each...
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used.
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Year Machine A Machine B
1 1,50,000 50,000
2 2,00,000 1,50,000
3 2,50,000 2,00,000
4 1,50,000 3,00,000
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