d Problem 21-1 Lease or Buy You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $6,000,000 and would be depreciated straight-line to zero over six years. Because of radiation contamination, it will actually be completely valueless in six years. You can lease it for $1,200,000 per year for six years. Assume that the tax rate is 21 percent. You can borrow at 6 percent before taxes. What is the NAL? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL $ 600,000.00 X Should you lease or buy? Buy Lease

d Problem 21-1 Lease or Buy You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $6,000,000 and would be depreciated straight-line to zero over six years. Because of radiation contamination, it will actually be completely valueless in six years. You can lease it for $1,200,000 per year for six years. Assume that the tax rate is 21 percent. You can borrow at 6 percent before taxes. What is the NAL? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL $ 600,000.00 X Should you lease or buy? Buy Lease

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter20: Hybrid Financing: Preferred Stock, Leasing, Warrants, And Convertibles

Section: Chapter Questions

Problem 13IC: FISH CHIPS INC, PART I LEASE ANALYSIS Martha Millon, financial manager for Fish it Chips Inc., has...

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Problem 21-9 Lease or Buy 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 $2 million in annual pretax cost savings. The system costs $9.3 million and will be depreciated straight-line to zero over its five-year life, after which it will be worthless. Wildcat's tax rate is 22 percent and the firm can borrow at 8 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2,150,000 per year. Lambert's policy is to require its lessees to make payments at the start of the year. a. What is the NAL for Wildcat? (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 lease payment that would be acceptable to Wildcat? (Do not round intermediate…
Problem 21-6 MACRS Depreciation and Leasing You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $8,200,000, Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $2,320,000 per year for four years. Assume that the tax rate is 24 percent. You can borrow at 6 percent before taxes. Assume that the scanner will be depreciated as three-year property under the MACRS depreciation. What is the NAL of the lease? (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
Problem 21-4 Taxes and Leasing Cash Flows You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $6,300,000 and would be depreciated straight-line to zero over six years. Because of radiation contamination, it will actually be completely valueless in six years. You can lease it for $1,260,000 per year for six years. Assume that your company does not contemplate paying taxes for the next several years. You can borrow at 6 percent before taxes. What is the NAL of the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL
FISH CHIPS INC, PART I LEASE ANALYSIS Martha Millon, financial manager for Fish it Chips Inc., has been asked to perform a lease-versus-buy analysis on a new computer system. The Computer costs 1,200,000, and if it is purchased. Fish Chips could obtain a term loan for the full amount at a 10% cost. The loan would be amortized over the 4-year life of the computer, with payments made at the end of each year The computer is classified as special purpose; hence, it falls into the MACRS 3-year class. The applicable MACRS rates are 33%. 45%. 15%, and 7%. If the computer is purchased, a maintenance contract must be obtained at a cost of 25,000, payable at the beginning of each year. After 4 years, the computer will be sold. Millons best estimate of its residual value at that time is 125,000. Because technology is changing rapidly however, the residual value is uncertain. As an alternative. National Leasing is willing to write a 4-year lease on the computer, including maintenance, for payments of 340,000 at the beginning of each year. Fish 4c Chipss marginal federal-plus-state tax rate is 40%. Help Millon conduct her analysis by answering the following questions. a. 1. Why is leasing sometimes referred to as "off-balance-sheet" financing? 2. What is the difference between a capital lease and an operating lease? 3. What effect does leasing have on a firms capital structure? b. 1. What is Fish Chips's present value cost of owning the computer? (Hint: Set up a table whose bottom line is a time line" that shows the cash flows over the period t = 0 to t = 4. Then find the PV of these cash flows, or the PV cost of owning.) 2. Explain the rationale for the discount rate you used to find the PV. c. 1. What is Fish Chipss present value cost of leasing the computer? (Hint: Again, construct a time line.) 2. What is the net advantage to leasing? Does your analysis indicate that the firm should buy or lease the computer? Explain. d. Now assume that Millon believes that the computers residual value could be as low as 0 or as high as 250,000, but she stands by 125,000 as her expected value. She concludes that the residual value is riskier than the other cash flows in the analysis, and she wants to incorporate this differential risk into her analysis. Describe how this can be accomplished. What effect will it have on the lease decision? e. Millon knows that her firm has been considering moving its headquarters to a new location, and she is concerned that these plans may come to fruition prior to the expiration of the lease. If the move occurs, the company would obtain new computers; hence, Millon would like to include a cancellation clause in the lease contract. What effect would a cancellation clause have on the risk of the lease?
Problem 9 A contractor is considering the following three alternatives: a. Purchase a new microcomputer system for $15,000. The system is expected to last 6 years with salvage value of $1,000. b. Lease a new microcomputer system for $3,000 per year, payable in advance. The system should last 6 years. c. Purchase a used microcomputer system for $8,200. It is expected to last 3 with no salvage value. Use a common-multiple-of-lives approach. If MARR of 8% is used, which alternative should be selected using a discounted present worth analysis? If the MARR is 12%, which alternate should be selected? years
QUESTION 6 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 %,32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the internal rate of return for this…
Item 9 You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $8,300,000, Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $2,385,000 per year for four years. Assume that the tax rate is 25 percent. You can borrow at 7 percent before taxes. Assume that the scanner will be depreciated as three-year property under the MACRS depreciation. What is the NAL of the lease? (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.)
QUESTION 5 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $55. The production cost of each heater is $35. You are expecting to sell 9000 units per year. This project has an economic life of 6 years. The project requires an investment of $700000 in plants and equipment. This equipment will be depreciated to zero salvage value based on 5-year MACRS schedule. The depreciation rates from year 1 to 6 are 20 % ,32 %, 19.2 %, 11.52 %, 11.52 %, and 5.76 percent, respectively. The required rate of return for the project is 12 percent, the working capital requirement is 10 percent of the next year's sales revenue. The company will sell its old equipment for $100,000. The old machine is fully depreciated. The marginal corporate tax rate is 20 percent. At the termination of the project, the plant and equipment will be sold for an estimated value of $50000. Based on these assumptions, estimate the net present value of the project.
QUESTION 7 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $120. The production cost of each heater is $90. The fixed cost of production is $35000. This project has an economic life of 5 years. The project requires an investment of $125000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 12 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions, calculate the number of units of production at the accounting (net profit) break-even point.
Problem 21-11 Deposits in Leasing 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 $2.6 million in annual pretax cost savings. The system costs $7.7 million and will be depreciated straight-line to zero over its five-year life, after which it will be worthless. Wildcat's tax rate is 21 percent and the firm can borrow at 6 percent. Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,660,000 per year. Lambert's policy is to require its lessees to make payments at the start of the year. Suppose Lambert requires Wildcat to pay a $790,000 security deposit at the inception of the lease. Calculate the NAL with the security deposit. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,…
QUESTION 8 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $120. The production cost of each heater is $90. The fixed cost of production is $35000. This project has an economic life of 5 years. The project requires an investment of $125000 in plants and equipment. This equipment will be depreciated using a straight line depreciation method to a salvage value of zero. The required rate of return for the project is 12 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions, calculate the number of units at the operating cash flow break-even point.
QUESTION 5 You are considering starting a new factory producing small electric heaters. Each unit will sell at a price of $120. The production cost of each heater is $90. The fixed cost of production is $35000. This project has an economic life of 5 years. The project requires an investment of $125000 in plants and equipment. This equipment will be depreciated using a straight-line depreciation method to a salvage value of zero. The required rate of return for the project is 12 percent. The marginal corporate tax rate is 21 percent. Based on these assumptions, calculate the number of units of production at the net present value (financial) break-even point.