The owner of an industrial juicing machine (initial value $1 million, economic life 10 years) considers...

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.

Expert Solution

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 = (100000050%)8% = 40000
	DEPRECIATION = 1000000/10 = 100000

So we have a Net loss of 1000000-741140.80 = 258859 , when we put juice machin on lease.

ekkarill92 answered 2 years ago

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