(Related to Checkpoint 18.2) (Calculating the cost of short-term financing) The R. Morin Construction Company needs to borrow $110,000 to help finance the cost of a new $165,000 hydraulic crane usedin the firm's commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase:Alternative A. The firm's bank has agreed to lend the $110,000 at a rate of 13 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However,the compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $27,500 in the bank.Alternative B. The equipment dealer has agreed to finance the equipment with a 1-year loan. The $110,000 loan requires payment of principal and interest totaling $128,909.a. Which alternative should Morin select?b. If the bank's compensating-balance requirement had necessitated idle demand deposits equal to 15 percent of the loan, what effect would this have had on the cost of the bank loan alternative?a. The cost of Alternative A would be %. (Round to two decimal places.)

A borrower is required to keep a minimum deposit in their bank account, described as a compensating…

Answered: (Related to Checkpoint 18.2)…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 8P

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(Related to Checkpoint 18.2) (Calculating the cost of short-term financing) The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in the firm's commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase: Alternative A. The firm's bank has agreed to lend the $100,000 at a rate of 13 percent. Interest would be discounted, and a 16 percent compensating balance would be required. However, the compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank. Alternative B. The equipment dealer has agreed to finance the equipment with a 1-year loan. The $100,000 loan requires payment of principal and interest totaling $117,390. a. Which alternative should Morin select? b. If the bank's compensating-balance requirement had…
Consider the case of Shoe Building Inc. (SBI): Shoe Building Inc. (SBI) is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). SBI can take out a four-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions: •The annual maintenance expense for the equipment is expected to be $350.•The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System's (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively.•The corporate tax rate for SBI is 40%.Note: Shoe Building Inc. (SBI) is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: ValueAnnual tax savings from maintenance will be:$140 Tax savings from depreciation Year 1 Year 2 Year 3 Year 4 $4,666…
Consider the case of Shoe Building Inc. (SBI): Shoe Building Inc. (SBI) is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). SBI can take out a four-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions: • The annual maintenance expense for the equipment is expected to be $350. • The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System’s (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. • The corporate tax rate for SBI is 40%. Note: Shoe Building Inc. (SBI) is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: Value Annual tax savings from maintenance will be: $140 Year 1 Year 2 Year 3…
Consider the case of Shoe Building Inc. (SBI): Shoe Building Inc. (SBI) is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). SBI can take out a four-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions: • The annual maintenance expense for the equipment is expected to be $350. The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System's (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. • The corporate tax rate for SBI is 40%. Note: Shoe Building Inc. (SBI) is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: Value Annual tax savings from maintenance will be: $140 Year 1 Year 2 Year 3 Year 4 Tax savings from depreciation $4,666 $6,223 $2,073…
Water Cutter Co. is considering purchasing a system to assist inw ater jet manfacturing. The system costs $200,000. It has an expected life of 7 years, at which time its salvage value will be $9,500. Operating and maintenance expenses are estimaed to be $20,000 per year. If the system is purchased, additional revenues will be $40,000 per year. Water Cutter Co. must borrow half of the purchases price. The bank as agreed to three equal annual payments, with the first payment due at the end of year 1. The loan interest rate i 16% compounded annually. Water Cutter Co's MARR is 15% compounded annually. 1. Calculate the loan payment amount. 2. Calculate the present worth of the investment. 3. Based on the present worth you calculated, should Water Cutter Co. purchase the system? Why or why not? Water Cutter Co. is considering purchasing a system to assist inw ater jet manfacturing. The system costs $200,000. It has an expected life of 7 years, at which time its salvage value will be…
Water Cutter Co. is considering purchasing a system to assist inw ater jet manfacturing. The system costs $200,000. It has an expected life of 7 years, at which time its salvage value will be $9,500. Operating and maintenance expenses are estimaed to be $20,000 per year. If the system is purchased, additional revenues will be $40,000 per year. Water Cutter Co. must borrow half of the purchases price. The bank as agreed to three equal annual payments, with the first payment due at the end of year 1. The loan interest rate i 16% compounded annually. Water Cutter Co's MARR is 15% compounded annually. 1. Calculate the loan payment amount. 2. Calculate the present worth of the investment. 3. Based on the present worth you calculated, should Water Cutter Co. purchase the system? Why or why not?
XYZ is evaluating a project that would require the purchase of a piece of equipment for $560,000 today. During year 1, the project is expected to have relevant revenue of $761,000, relevant costs of $205,000, and relevant depreciation of $130,000. XYZ would need to borrow $560,000 today to pay for the equipment and would need to make an interest payment of $38,000 to the bank in 1 year. Relevant net income for the project in year 1 is expected to be $337,000. What is the tax rate expected to be in year 1? O A rate less than 16.43% or a rate greater than 52.83% O A rate equal to or greater than 16.43% but less than 21.92% O A rate equal to or greater than 21.92% but less than 24.67% O A rate equal to or greater than 24.67% but less than 35.22% O A rate equal to or greater than 35.22% but less than 52.83%
XYZ is evaluating a project that would require the purchase of a piece of equipment for $440,000 today. During year 1, the project is expected to have relevant revenue of $786,000, relevant costs of $201,000, and relevant depreciation of $132,000. XYZ would need to borrow $440,000 today to pay for the equipment and would need to make an interest payment of $33,000 to the bank in 1 year. Relevant net income for the project in year 1 is expected to be $337,000. What is the tax rate expected to be in year 1? A rate equal to or greater than 21.96% but less than 26.61% A rate less than 21.96% or a rate greater than 46.34% A rate equal to or greater than 31.02% but less than 38.39% A rate equal to or greater than 38.39% but less than 46.34% A rate equal to or greater than 26.61% but less than 31.02%
The Prescott Welding Company needs toacquire a new lift truck for transporting its final product to the warehouse. One alternative is to purchasethe truck for $45,000, which will be financed by thebank at an interest rate of 12%. The loan must berepaid in four equal installments, payable at the endof each year. Under the borrow-to-purchase arrangement, Prescott Welding would have to maintain thetruck at an annual cost of $1,200, also payable atyear-end. Alternatively, Prescott Welding could leasethe truck under a four-year contract for a lease payment of $12,000 per year. Each annual lease payment must be made at the beginning of each year.The truck would be maintained by the lessor. Thetruck falls into the five-year MACRS classification,and it has a salvage value of $10,000, which is theexpected market value after four years, at which timePrescott Welding plans to replace the truck, irrespective of whether it leases or buys. Prescott Weldinghas a marginal tax rate of 40% and a MARR of…
Ben Ltd wishes to expand its manufacturing plant by purchasing a new state of art equipment. The company recently paid shs.20,000,000 for a market survey in respect of the new venture. You have been provided with the following information relating to the project. (i) For purposes of undertaking this venture, the company has obtained a loan from CEB Bank for shs.280,000,000 at an annual interest rate of 15% p.a. The equipment will be purchased from Brussels at a cost of shs.400,000,000. (ii) An additional shs.50,000,000 will be required to transport the equipment to Masaka and the cost of installing the equipment is shs.10,000,000. (iii)The firm will benefit from an investment incentive offered by the government of 8% of the invoice value of the equipment. (iv) The machines will be installed in a warehouse that had been generating rent of shs.15,000,000 per year. Due to operating efficiency of the machines, fewer staff will be required. This will reduce the wage bill from shs.70,000,000…
(Evaluation of Purchase Options) Sosa Excavating Inc. is purchasing a bulldozer. The equipment has a price of $100,000. The manufacturer has offered a payment plan that would allow Sosa to make 10 equal annual payments of $16,274.53, with the first payment due one year after the purchase.Instructions(a) How much total interest will Sosa pay on this payment plan?(b) Sosa could borrow $100,000 from its bank to finance the purchase at an annual rate of 9%. Should Sosa borrow from the bank or use the manufacturer’s payment plan to pay for the equipment?
(Ignore Income taxes in this problem.) The Wilson Company is contemplating the purchase of a helicopter for its executives to use in their business trips. This helicopter could be either purchased or leased from the manufacturer. The useful life of the helicopter is four years. Data concerning these two alternatives follow: Buy Lease P Purchase Price 900,000 Annual Cash payments for servicing and 10,000 Licenses Cash payments for repairs End of second year 6,000 End of third year 8,000 Salvage value 270,000 Annual rental payment P250,000 If the helicopter is leased, it would be returned to the manufacturer in four years. Wilson required rate of return is 22%. The incremental net present value in favor of leasing rather than purchasing is (rounded off to the nearest hundred pesos):

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