Concept explainers
a)
Case summary:
Company L has chosen to procure an unused advertise information and citation framework for its R domestic office. The framework gets current showcase costs and other data from a few on-line information administrations, at that point either shows the data on a screen or stores it for afterward recovery by the firm’s brokers. The framework moreover licenses clients to call up current cites on terminals within the campaign. The gear costs $1,000,000, and, in the event that it was obtained, company L might get a term credit for the total buy cost at a 10 percent intrigued rate. In spite of the fact that the gear contains a six-year valuable life, it is classified as a special-purpose computer, so it falls into the MACRS 3-year lesson. In the event that the framework was obtained, a 4-year upkeep contract can be obtained at a fetched of $20,000 per year, payable at the starting of each year. The hardware would be sold after 4 a long time, and the leading appraise of its leftover esteem at that time is $200,000. Be that as it may, since real-time show framework innovation is changing quickly, the real residual value is dubious. As an elective to the borrow-and-buy arrange, the gear producer educated Lewis that Solidified Renting would be willing to type in a 4-year rule rent on the gear, counting support, for installments of $260,000 at the starting of each year. Company L’s negligible federal-plus-state charge rate is 40 percent.
To determine: The consolidated
b)
To determine: The point of view on NPV of lessor if lease payment were set as $260,000 per year.
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Intermediate Financial Management (MindTap Course List)
- Use the following information for the next two problems: Barton Aviation is considering whether to lease or purchase an aircraft to transport its executives between company facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: Cash Flows After-Tax End of Year Lease (cash flows are all negative) PurchaseYrs 1-4 cash flows are negative; Year 5 is positive. 1. (40,000) (68,454) 2. (40,000) (59,110) 3. (40,000) (63,596) 4. (40,000) (66,633) 5. (40,000) 30,056 Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt. Given the above cash outflows: a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost…arrow_forwardwhat is the present value of the tax shield for the following project? the initial investment is $300,000. the project will last for 6 years, at which time the asset will be sold for $90,000. the asset will be depreciated on a declining balance basis at a rate of 20 percent. the firm's marginal tax rate is 40 percent. the firm's required rate of return is 8 percent a) 16,204.36 b) 82,539.68 c) 98,744.04 d) 66,335.32arrow_forwardSuppose that National Waferonics has before it a proposal for a four-year financial lease. Year 0 Year 1 Year 2 Year 3 Lease cash flow +59,200 −27,900 −23,300 −18,700 These flows reflect the cost of the machine, depreciation tax shields, and the after-tax lease payments. Ignore salvage value. Assume the firm could borrow at 14% and faces a 21% marginal tax rate. a. What is the value of the equivalent loan? b. What is the value of the lease?arrow_forward
- Use the following information for the next two problems: Top management of Markel Company is considering whether to lease or purchase an aircraft to transport them around the country. They are in the 40 percent tax bracket and their after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below. (The Year 5 purchase cash flow is positive since they rent out the aircraft for part of that year.) End of Year Lease (cash flows are all negative) PurchaseYrs 1-4 cash flows are negative; Year 5 is positive. 1. (40,000) (68,454) 2. (40,000) (59,110) 3. (40,000) (63,596) 4. (40,000) (66,633) 5. (40,000) 30,056 Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt. Given the above cash outflows: a) Calculate the present value of the after-tax cash flows of the…arrow_forwardNorthwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $200,000. The machine can be leased or purchased. The firm is in the 27% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease The leasing arrangement requires end-of-year payments of $59,000 over five years. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $20,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase If the firm purchases the machine, its cost of $200,000 will be financed with a five-year, 17% loan requiring equal end-of-year payments of $62,513. The machine will be depreciated under MACRS using a 5-year recovery period. (See LOADING... for the applicable depreciation percentages.)…arrow_forwardJLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The returns of the least and of the purchase are as follows:Lease Annual end-of-year lease payments of $25,200 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at termination of the lease. Purchase The research equipment, costing $60,000, can be financed entirely with a 14% loan requiring annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-yar recovery period (33.33%, 44.45%, 14.81%, and 7.41%, respectively). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to…arrow_forward
- JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The returns of the least and of the purchase are as follows:Lease Annual end-of-year lease payments of $25,200 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at termination of the lease. Purchase The research equipment, costing $60,000, can be financed entirely with a 14% loan requiring annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-yar recovery period (33.33%, 44.45%, 14.81%, and 7.41%, respectively). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to…arrow_forwardANB Leasing is planning to lease an asset costing $210,000. The lease period will be 6 years. At the end of 6 years, the salvage value is estimated to be $30,000. The asset will be depreciated on a straight-line basis of $30,000 per year over the 6-year period. ANB's marginal income tax rate is 40%, but its average tax rate is only 31.5%. Assuming ANB Leasing requires a 12% after-tax rate of return on the lease, determine the required annual beginning of the year lease payments. a. $31,592 b. $46,120 c. $45,609 d. $52,653arrow_forwardJudgo Corporation is attempting to determine whether it should lease or purchase equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows: I Lease there will be annual end-of-year lease payments of $25,200 each year over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will be able to exercise its option to purchase the asset for $5,000 at termination of the lease. I Purchase The equipment which costs $60,000 can be financed completely with a 14% loan that requires annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-year recovery period. (33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the…arrow_forward
- Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease: The leasing arrangement requires beginning-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase: If the firm purchases the machine, its cost of $80,000 will be financed with a 14% loan amortised over 5-year period. The machine will be depreciated under MACRS using a 5-year recovery period. The firm will pay $2,000 per year at the beginning of the year for a service contract that covers all maintenance costs. The…arrow_forwardNorthwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease: The leasing arrangement requires beginning-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase: If the firm purchases the machine, its cost of $80,000 will be financed with a 14% loan amortised over 5-year period. The machine will be depreciated under MACRS using a 5-year recovery period. The firm will pay $2,000 per year at the beginning of the year for a service contract that covers all maintenance costs. The…arrow_forwardASB is considering leasing a new machine. The lease calls for 9 payments of $1,403 per year with the first payment occurring immediately. The machine costs $8,683 to buy. The present value of CCA tax shield is $998. The present value of its salvage value is $496 and the present value of CCA recapture is $61. ASB firm can borrow at a rate of 10%. The corporate tax rate is 30%. What is the NPV of leasing?arrow_forward
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