In: Accounting
The owner of an industrial juicing machine (initial value $1 million, economic life 10 years) considers leasing it under a 7-year leasing contact at $ 175,000 / year. The estimated value of the machine at the end of the lease is 40% of its initial value which will be taxable at 35%. Consider an 8% cost of debt capital and 12% cost of equity capital. The juicing machine was initially acquired using external financing and own equity in equal amounts. The owner uses straight line depreciation. Calculate the present-valued profitability of this lease for the lessor.
Disconted Cash Flow: | ||||||||||
Year | Income(A) | Depreciation(B) | Finance Charges(8%) © | D =A-B-C | Tax(35%) (E) | F=D-E | Depreciation(G) | H=F+G | Cost of Equity(12%)(I) | Present Value (G*I) |
1 | 1,75,000.00 | 1,00,000.00 | 40,000.00 | 35,000.00 | 12250 | 22,750.00 | 1,00,000.00 | 1,22,750.00 | 0.892857143 | 1,09,598.21 |
2 | 1,75,000.00 | 1,00,000.00 | 40,000.00 | 35,000.00 | 12250 | 22,750.00 | 1,00,000.00 | 1,22,750.00 | 0.797193878 | 97,855.55 |
3 | 1,75,000.00 | 1,00,000.00 | 40,000.00 | 35,000.00 | 12250 | 22,750.00 | 1,00,000.00 | 1,22,750.00 | 0.711780248 | 87,371.03 |
4 | 1,75,000.00 | 1,00,000.00 | 40,000.00 | 35,000.00 | 12250 | 22,750.00 | 1,00,000.00 | 1,22,750.00 | 0.635518078 | 78,009.84 |
5 | 1,75,000.00 | 1,00,000.00 | 40,000.00 | 35,000.00 | 12250 | 22,750.00 | 1,00,000.00 | 1,22,750.00 | 0.567426856 | 69,651.65 |
6 | 1,75,000.00 | 1,00,000.00 | 40,000.00 | 35,000.00 | 12250 | 22,750.00 | 1,00,000.00 | 1,22,750.00 | 0.506631121 | 62,188.97 |
7 | 1,75,000.00 | 1,00,000.00 | 40,000.00 | 35,000.00 | 12250 | 22,750.00 | 1,00,000.00 | 1,22,750.00 | 0.452349215 | 55,525.87 |
7 | Salvage | 4,00,000.00 | 0.452349215 | 1,80,939.69 | ||||||
7,41,140.80 | ||||||||||
FINANCE CHARGES = (1000000*50%)*8% = 40000 | ||||||||||
DEPRECIATION = 1000000/10 = 100000 |
So we have a Net loss of 1000000-741140.80 = 258859 , when we put juice machin on lease.