PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 25, Problem 19PS
Valuing financial leases The Safety Razor Company has a large tax-loss carry-forward and does not expect to pay taxes for another 10 years. The company is therefore proposing to lease $100,000 of new machinery. The lease terms consist of eight equal lease payments prepaid annually. The lessor can write the machinery off over seven years using straight-line
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The Safety Razor Company has a large tax-loss carry-forward and does not expect to pay taxes for another 10 years. The company is therefore proposing to lease $110,000 of new machinery. The lease terms consist of 7 equal lease payments prepaid annually. The lessor will take CCA on the machinery at a 30% rate and the pool will never close. The first CCA tax deduction is assumed to occur at the end of the first year. There is no salvage value at the end of the machinery’s economic life. The tax rate is 35%,and the rate of interest is 11%. Wilbur Occam, the president of Safety Razor, wants to know the minimum lease payment that the lessor is likely to accept. (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)
The minimum lease payment$
Pike Industries is considering selling excess machinery with a book value of $150,000 (original cost of $475,000 less accumulated depreciation of $325,000) for $72,500
less a 5% brokerage commission. Alternatively, the machinery can be leased out for a total of $107,500 for five years, after which it is expected to have no residual value.
During the period of the lease, Pike Industries' costs of repairs, insurance, and property tax expenses are expected to be $40,000.
a. Prepare a differential analysis report for the lease or sell decision.
PIKE INDUSTRIES
Proposal to Lease or Sell Machinery
Differential Analysis Report
Differenti revenue from alternatives:
Differential cost of alternatives:
b. Based on the data presented, which is the most appropriate plan of action?
Chapter 25 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Inflation and operating leases In Problem 7, we...Ch. 25 - Technological change and operating leases Look at...Ch. 25 - Valuing financial leases Look again at Problem 7....Ch. 25 - Valuing Financial Leases Look again at the...
Ch. 25 - Valuing financial leases Look again at the bus...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Valuing financial leases Nodhead College needs a...Ch. 25 - Valuing financial leases The Safety Razor Company...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 23PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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