Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10payments of $1,000 per year with the first payment occurring immediately. The computer would cost$7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actualsalvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%.The corporate tax rate is 30%. What is the after-tax cash flow from leasing relative to the after-tax cashflow from purchasing in years 1-9?

Cash flow is a critical financial metric that reflects the movement of funds in and out of a…

Answered: Your firm is considering leasing a new…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

A company is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $58,000 per year with the first payment occurring immediately. The equipment would cost $250,000 to buy and would be straight-line depreciated to a zero salvage value over 5 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6%. The corporate tax rate is 21 percent. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0? -$2,645.01 -$2,820.71 -$2,996.41 -$3,172.11 -$3,347.81
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the maximum lease payment that you would be willing to make?
2. The controller has asked you to consider three separate options that your firm has for getting a new software/computer system. The first option is to lease the system. The annual payment will be $15 million for the first year and it will grow at 5% a year. The lease contract is 5 years long. In this case, the lease expenses are operating and therefore would be tax-deductible. The second option is to buy the system for $38 million and depreciate it over 4 years, which is the expected life of the project. A third choice is to buy the system for $38 million and take it as an immediate expense. The system has an expected life of 4 years. If the tax rate is 40% and the cost of capital is 10%, estimate the equivalent annual costs of each option.
Consider a firm A that wishes to acquire an equipment. The equipment is expected to reduce costs by $5700 per year. The equipment costs $29000 and has a useful life of 7 years. If the firm buys the equipment, they will depreciate it straight-line to zero over 7 years and dispose of it for nothing. They can lease it for 7 years with an annual lease payment of $8000. If the after-tax interest rate on secured debt issued by company A is 7% and tax rate is 25%, what is the Net Advantage to Leasing (NAL)?(keep two decimal places) Answer: -18233.59
Consider a firm A that wishes to acquire an equipment. The equipment is expected to reduce costs by $4200 per year. The equipment costs $25000 and has a useful life of 5 years. If the firm buys the equipment, they will depreciate it straight-line to zero over 5 years and dispose of it for nothing. They can lease it for 5 years with an annual lease payment of $5000. If the after-tax interest rate on secured debt issued by company A is 2% and tax rate is 35%, what is the Net Advantage to Leasing (NAL)?(keep two decimal places)
ASB 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?
ABC Co is considering either leasing or buying a new freezer unit. The unit costs $6.4 million and it qualifies for a 30% CCA rate. The unit will be valueless in four years. ABC Co can lease it for $1.92 million per year for four years. The assets pool remains open and payments are made at the end of the year. ABC faces a tax rate of 40% and can borrow at 7% pre-tax. What would the lease payment have to be for both lessor and lessee to be indifferent to the lease? $1,985,338 O $2,200,357 O $1,965,060 O $1,937,363 $2,156,357
Assume zero taxes. Equipment can be leased at $10,000 per year (first payment one year hence) for ten years or purchased at a cost of $64,177. The company has a weighted average cost of capital of 15 percent. A bank has indicated that it would be willing to make a loan of $64,177 at a cost of 10 percent. Should the company buy or lease? The equipment will be used for ten years. There is zero salvage value.
Sigma Tools will lease a computerized stamping machine from StarBanc. The machine costs $500,000 and will be depreciated on a straight-line basis to a zero book value over the next 5 years, which is also the term of the lease. The expected salvage value in 5 years is $25,000. StarBanc's marginal tax rate is 30% and it requires an after-tax rate of return of 12% on investments of this type. What annual, end-of-the-year, pretax lease payment must StarBanc receive to earn the required 12% return?
A physics lab is considering leasing a diagnostic scanner that costs $5,800,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for four years. Assume tax rate is 21% for the leasing company (lessor) and zero for the lab. The cost of borrowing is 8%. Over what range of lease payments will the lease be profitable for both lessee and lessor? handwrite please
You work for a nuclear research laboratory that is contemplating leasing a diagnostic The scanner costs RM6,300,000 and it would be depreciated straight-line to zero over four years. You can lease it for RM1,745,000 per year for four years. Assume that the tax rate is 36%. You can borrow at 8% before taxes. Justify whether you should lease or buy. Calculate the depreciation of the machine for each year. RM 6.3 mil /4 = ? Calculate the tax shield. RM 1,575,000 x 0.36 = RM 567,000 Calculate after tax lease payment RM1,745,000 x (1 – 0.36) = RM 1,116,800 Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 After Tax Lease Payment RM 1,116,800 RM 1,116,800 RM 1,116,800 RM 1,116,800 Depreciation tax shield RM 567,000 RM 567,000 RM 567,000 RM 567,000 Cost of Machine (RM 6.3 mil) Total Cash Flow (RM 6.3 mil) ? ? ? ?…
Super Sonics Entertainment is considering buying a machine that costs $445,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $121,000. The company can issue bonds at a 10 percent interest rate. If the corporate tax rate is 35 percent. Assume that lease payments occur at the end of the year Calculate the NAL

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