Question

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 repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1,425,000 per year are due at the beginning of each of the four years of the lease.

a. What is the NAL of leasing for Wolfson? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL $

b. What is the maximum annual lease payment Wolfson would be willing to pay? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer #1

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...

Wolfson Corporation has decided to purchase a new machine that
costs $4.1 million. The machine will be depreciated on a
straight-line basis and will be worthless after four years. The
corporate tax rate is 21 percent. The Sur Bank has offered Wolfson
a four-year loan for $4.1 million. The repayment schedule is four
yearly principal repayments of $1,025,000 and an interest charge of
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of each year. Both principal...

High electricity costs have made Farmer Corporation’s
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This machine will save Farmer $37,500 per year through reductions
in electricity costs. As an alternative, Farmer can purchase a more
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$450,000. This machine...

High electricity costs have made Farmer Corporation’s
chicken-plucking machine economically worthless. Only two machines
are available to replace it. The International Plucking Machine
(IPM) model is available only on a lease basis. The lease payments
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Lease versus Buy
Big Sky Mining Company must install $1.5 million of new
machinery in its Nevada mine. It can obtain a bank loan for 100% of
the purchase price, or it can lease the machinery. Assume that the
following facts apply:
The machinery falls into the MACRS 3-year class. (The
depreciation rates for Year 1 through Year 4 are equal to 0.3333,
0.4445, 0.1481, and 0.0741.)
Under either the lease or the purchase, Big Sky must pay for
insurance,...

Big Sky Mining Company must install $1.5 million of new
machinery in its Nevada mine. It can obtain a bank loan for 100% of
the purchase price, or it can lease the machinery. Assume that the
following facts apply:
The machinery falls into the MACRS 3-year class. (The
depreciation rates for Year 1 through Year 4 are equal to 0.3333,
0.4445, 0.1481, and 0.0741.)
Under either the lease or the purchase, Big Sky must pay for
insurance, property taxes, and...

Problem 21-7 Lease or Buy Super Sonics Entertainment is
considering buying a machine that costs $600,000. 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 $175,000. The company can issue bonds at an
interest rate of 8 percent. The corporate tax rate is 40 percent.
What is the NAL of the lease? (A negative answer should be
indicated by a...

After deciding to get a new car, you can either lease the car or
purchase it with a four-year loan. The car you wish to buy costs
$35,500. The dealer has a special leasing arrangement where you pay
$100 today and $500 per month for the next four years. If you
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next four years at an APR of 7 percent, compounded monthly. You
believe that you will...

Six months ago, Qualitybank issued a $126 million,
one-year-maturity CD, denominated in British pounds (Euro CD). On
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$53 million in a U.S. Treasury bill. The exchange rate on this date
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a.
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and pounds? (Do not round...

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