Question

In: Finance

Comey Products has decided to acquire some new equipment having a $170,000 purchase price. The equipment...


Comey Products has decided to acquire some new equipment having a $170,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comeyâ€s question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar.
$   

Solutions

Expert Solution

Solution :-

After Tax Cost of Debt = 5% * ( 1 - 0.25 ) = 3.75%

Therefore cost of borrowing = $130,442

If there is any doubt please ask in comments


Related Solutions

Comey Products has decided to acquire some new equipment having a $170,000 purchase price. The equipment...
Comey Products has decided to acquire some new equipment having a $170,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing...
Comey Products has decided to acquire some new equipment having a $270,000 purchase price. The equipment...
Comey Products has decided to acquire some new equipment having a $270,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 10% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing...
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...
Mattel, Inc. has decided to acquire a new equipment at a cost of $760,000. The equipment...
Mattel, Inc. has decided to acquire a new equipment at a cost of $760,000. 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. Mass Financing has offered to lease the equipment to Mattel for $148,000 a year for 6 years. Mattel has a cost of equity...
Mattel, Inc. has decided to acquire a new equipment at a cost of $760,000. The equipment...
Mattel, Inc. has decided to acquire a new equipment at a cost of $760,000. 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. Mass Financing has offered to lease the equipment to Mattel for $148,000 a year for 6 years. Mattel has a cost of equity...
Lear Corporation has decided to acquire a new equipment at a cost of $698,000. The equipment...
Lear Corporation has decided to acquire a new equipment at a cost of $698,000. 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. Riverhawk Financing has offered to lease the equipment to Lear for $135,000 a year for 6 years. Lear has a cost of equity...
1. An oil refinery has decided to purchase some new drilling equipment for $550,000. The equipment...
1. An oil refinery has decided to purchase some new drilling equipment for $550,000. The equipment will be kept for 10 years before being sold. The estimated salvage value (SV) for depreciation purposes is to be $25,000. Use this information to solve the following questions: a) Using the straight-line (SL) method, the annual depreciation on the equipment is _________________. b) Using the double declining balance (DDB) method, the depreciation charge in year 3 is ______________. c) Using the SL method,...
Veritas Inc. has decided to acquire a new Hydraulic Excavator. It has three options. Caterpillar: purchase...
Veritas Inc. has decided to acquire a new Hydraulic Excavator. It has three options. Caterpillar: purchase cost of $350,324 and operating costs of $21,964 per year (paid at the end of each year). John Deere: purchase cost of $285,068 and operating costs of $20,274 per year (paid at the end of each year). Volvo: purchase cost of $307,686 and operating costs of $15,767 per year (paid at the end of each year). Assume that Geek Inc. has a budget of...
Veritas Inc. has decided to acquire a new Hydraulic Excavator. It has three options. Caterpillar: purchase...
Veritas Inc. has decided to acquire a new Hydraulic Excavator. It has three options. Caterpillar: purchase cost of $356609 and operating costs of $20439 per year (paid at the end of each year). John Deere: purchase cost of $280828 and operating costs of $24980 per year (paid at the end of each year). Volvo: purchase cost of $311464 and operating costs of $18932 per year (paid at the end of each year). Assume that Geek Inc. has a budget of...
Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $35,000. The...
Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $35,000. The equipment has a 4-year life. The company expects to sell the equipment at the end of year 4 for $7,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $9,000 a year. The firm can borrow money at 9 percent and has a...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT