Question

A manager has decided to buy a widget. Two alternative financing methods are available: (A) use a financial lease or (B) purchase the widget using owner financing and borrowed capital. The financial lease is a 3 year lease with annual lease payments of $6,500 paid at the beginning of each year (a lease payment is tax deductible; assume it can be claimed at the beginning of each year). The manager can buy the widget for $20,000 and sell it again in 3 years for $5,000. A bank will loan $15,000 and the loan will be fully amortized at 10% over 3 years with annual payments. The IRS will allow the widget to be depreciated over 10 years. The marginal tax rate is 15%. The manager requires at least a 10% pre-tax return on capital. Assume that the inflation rate is 0%. Should the manager buy or lease?

What is the after-tax discount rate?

What is the after-tax lease payment (absolute value)?

What is the annual depreciation if you lease the widget (absolute value)?

What is the tax savings from depreciation if you lease the widget (absolute value)?

What is the present value of the lease payment (absolute value)?

What is the net present value of leasing the widget (absolute value)?

What is the annuity equivalent of leasing the widet (absolute value)?

What is the after-tax terminal value if you purchase the widget (absolute value)?

What is the net present value of purchasing the widget (absolute value)?

What is the annuity equivalent of purchasing the widet (absolute value)?

Leasing the Widget has a lower cost so you would choose to lease the Widget?

Answer #1

After deciding to buy a new car, you can either lease the car or
purchase it with a three-year loan. The car costs $30,000. The
dealer has a lease program where you pay $100 today and $400 per
month for the next three years. If you purchase the car, you will
pay it off in monthly payments over the next three years at a 8
percent APR. You believe that you will be able to sell the car for
$20000...

Riverton Mining plans to purchase or lease $ 300,000 worth of
excavation equipment. If? purchased, the equipment will be
depreciated on a? straight-line basis over five? years, after which
it will be worthless. If? leased, the annual lease payments will be
$ 70,301 per year for five years. Assume? Riverton's borrowing cost
is 8.5 % ?, its tax rate is 35 % ?, and the lease qualifies as a
true tax lease.
a. If Riverton purchases the? equipment, what is...

After deciding to buy a new car, you can either lease the car or
purchase it on a three-year loan. The car you wish to buy costs
$32,500. The dealer has a special leasing arrangement where you pay
$94 today and $494 per month for the next three years. If you
purchase the car, you will pay it off in monthly payments over the
next three years at an APR of 6 percent. You believe you will be
able to...

Riverton Mining plans to purchase or lease
$ 430 comma 000$430,000
worth of excavation equipment. If purchased, the equipment will
be depreciated on a straight-line basis over five years, after
which it will be worthless. If leased, the annual lease payments
will be
$ 97 comma 133$97,133
per year for five years. Assume Riverton's borrowing cost
is
7.0 %7.0%,
its tax rate is
40 %40%,
and the lease qualifies as a true tax lease.
a. If Riverton purchases the equipment,...

You buy a car, which cost $320.000. The purchase can be
financed with a payment of 20% and the remaining 80% is covered by
an 8-year annuity loan. The loan bears interest rate of 3% p.a.,
and it has monthly terms in the following you therefore also apply
a discount rate of 3% p.a.
a) Determine the size of the payment, U, and the monthly
payment, Y, belonging to the loan.
You consider if it is realistic to sell the...

You are considering
leasing a piece of equipment. Compute the Present Value of
Leasing Costs (after taxes). The details of the lease are
as follows:
Annual Lease Payments
= $12,400 (due at Beginning of Year)
Lease Term = 5 Years
Corporate Tax Rate = 30%
Present Value Discount Rate = 7%

The Vision Company is evaluating the acquisition of an asset
that it requires for a period of 6 years. The following information
relates to the purchase of the asset:
a) The purchase price is $1 million.
b) It can be depreciated at a rate of 10 per cent per annum,
straight-line.
c) The estimated disposal value in 6 years' time is $300
000.
d) The company income tax rate is 30 cents in the dollar.
e) The required rate of...

The Mikata Corporation is considering leasing a machine. The
machine would cost $226,000 to buy and it would be depreciated
straight-line to zero over five years. The machine will have zero
salvage value in five years. Mikata can lease the equipment for
$49,000 per year for five years, with the lease payment due at the
beginning of each year. The firm can borrow at a rate of 6%. The
firm has a tax rate of 25%. What is the after-tax...

(Complex stream of cash flows)
Roger Sterling has decided to buy an ad agency and is going to
finance the purchase with seller financing—that is, a loan from
the current owners of the agency. The loan will be for $2,200,000
financed at an APR of 6 percent compounded monthly. This loan will
be paid off over 6 years with end-of-month payments, along with a
$500,000 balloon payment at the end of year 6. That is, the $2.2
million loan will...

Wolfson Corporation has decided to purchase a new machine that
costs $5.1 million. The machine will be depreciated on a
straight-line basis and will be worthless after four years. The
corporate tax rate is 30 percent. The Sur Bank has offered Wolfson
a four-year loan for $5.1 million. The repayment schedule is four
yearly principal repayments of $1,275,000 and an interest charge of
6 percent on the outstanding balance of the loan at the beginning
of each year. Both principal...

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