Question

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 9 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 $1,200,000 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 enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the maximum annual lease Wolfson would be willing to pay? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.

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 $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...

A firm is considering an investment in a new machine with a
price of $16.1 million to replace its existing machine. The current
machine has a book value of $5.8 million and a market value of $4.5
million. The new machine is expected to have a 4-year life, and the
old machine has four years left in which it can be used. If the
firm replaces the old machine with the new machine, it expects to
save $6.5 million in...

The Wildcat Oil Company is trying to decide whether to lease or
buy a new computer-assisted drilling system for its oil exploration
business. Management has decided that it must use the system to
stay competitive; it will provide $3.4 million in annual pretax
cost savings. The system costs $8.4 million and will be depreciated
straight-line to zero over 5 years. Wildcat's tax rate is 21
percent, and the firm can borrow at 7 percent. Lambert Leasing
Company has offered to...

The Wildcat Oil Company is trying to decide whether to lease or
buy a new computer-assisted drilling system for its oil exploration
business. Management has decided that it must use the system to
stay competitive; it will provide $3.6 million in annual pretax
cost savings. The system costs $8.6 million and will be depreciated
straight-line to zero over 5 years. Wildcat's tax rate is 23
percent, and the firm can borrow at 7 percent. Lambert Leasing
Company has offered to...

Vandelay Industries is considering the purchase of a new machine
for the production of latex. Machine A costs $3,210,000 and will
last for six years. Variable costs are 37 percent of sales, and
fixed costs are $350,000 per year. Machine B costs $5,455,000 and
will last for nine years. Variable costs for this machine are 32
percent of sales and fixed costs are $240,000 per year. The sales
for each machine will be $12.4 million per year. The required
return...

Herjavec Enterprises is thinking about introducing a new surface
cleaning machine. The marketing department has come up with the
estimate that the company can sell 16 units per year at $301,000
net cash flow per unit for the next four years. The engineering
department has come up with the estimate that developing the
machine will take a $14.4 million initial investment. The finance
department has estimated that a discount rate of 13 percent should
be used.
a.
What is the...

Herjavec Enterprises is thinking about introducing a new surface
cleaning machine. The marketing department has come up with the
estimate that the company can sell 16 units per year at $304,000
net cash flow per unit for the next four years. The engineering
department has come up with the estimate that developing the
machine will take a $14.8 million initial investment. The finance
department has estimated that a discount rate of 12 percent should
be used.
a.What is the base-case...

Herjavec Enterprises is thinking about introducing a new surface
cleaning machine. The marketing department has come up with the
estimate that the company can sell 16 units per year at $304,000
net cash flow per unit for the next four years. The engineering
department has come up with the estimate that developing the
machine will take a $14.8 million initial investment. The finance
department has estimated that a discount rate of 12 percent should
be used.
a.What is the base-case...

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
will be $97,000 for five years, due at the beginning of each year.
This machine will save Farmer $37,500 per year through reductions
in electricity costs. As an alternative, Farmer can purchase a more
energy-efficient machine from Basic Machine Corporation (BMC) for
$450,000. This machine...

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