s cesProblem 5-13 (Algo) Lease vs. buy alternatives [LO5-3, 5-8, 5-10]Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. Themachine needed is manufactured by Lollie Corporation. The machine can be used for 10 years and thensold for $27,000 at the end of its useful life. Lollie has presented Kiddy with the following options:1. Buy machine. The machine could be purchased for $177,000 in cash. All maintenance costs, whichapproximate $22,000 per year, would be paid by Kiddy.2. Lease machine. The machine could be leased for a 10-year period for an annual lease payment of$42,000 with the first payment due immediately. All maintenance costs will be paid for by the LollieCorporation and the machine will revert back to Lollie at the end of the 10-year period.Required:Assuming that a 10% interest rate properly reflects the time value of money in this situation and that allmaintenance costs are paid at the end of each year, determine which option Kiddy should choose. Ignoreincome tax considerations.Note: Round your final answers to nearest whole dollar amount. Use tables, Excel, or a financialcalculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)Buy optionLease optionKiddy should choosePV-312115.80 I

Here,Details of Buying Option: Purchase Price of Machine -$1,77,000.00Life of Machine in…

Answered: Kiddy Toy Corporation needs to acquire…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter19: Lease Financing

Section: Chapter Questions

Problem 1P: Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the...

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Problem 5-13 (Algo) Lease vs. buy alternatives [LO5-3, 5-8, 5-10] Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corporation. The machine can be used for 10 years and then sold for $27,000 at the end of its useful life. Lollie has presented Kiddy with the following options: 1. Buy machine. The machine could be purchased for $177,000 in cash. All maintenance costs, which approximate $22,000 per year, would be paid by Kiddy. 2. Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $42,000 with the first payment due immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine will revert back to Lollie at the nd of the 10-year period. Required: Assuming that a 10% interest rate properly reflects the time value of money in this situation and that all maintenance costs are paid at the end of each year, determine which…
Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the equipment or borrow 200 from a local bank and buy the equipment. Reynoldss balance sheet prior to the acquisition of the equipment is as follows: a. (1) What is RCs current debt ratio? (2) What would be the companys debt ratio if it purchased the equipment? (3) What would be the debt ratio if the equipment were leased and the lease not capitalized? (4) What would be the debt ratio if the equipment were leased and the lease were capitalized? Assume that the present value of the lease payments is equal to the cost of the equipment. b. Would the companys financial risk be different under the leasing and purchasing alternatives?
Show Attempt History Current Attempt in Progress The Bramble Company manufactures 3,800 units of a part that could be purchased from an outside supplier for $14 each. Bramble's costs to manufacture each part are as follows: Direct materials $3 Direct labor Variable manufacturing overhead Fixed manufacturing overhead 9. Total $19 All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses. (a-b) Gress margin-ISalos Cost/Sales >> F1O F9 FB F7 F6 F5 吕口 F4 F3
Carolina Trucking Company (CTC) is evaluating a potential lease agreement on a truck that costs $40,000 and falls into the MACRS 3-year class. The applicable MACRS depreciation rates are 0.33, 0.45, 0.15, and 0.07. The loan rate would be 10 percent, if CTC decided to borrow money and buy the asset rather than lease it. The truck has a 4-year economic life, and its estimated residual value is $10,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment at the beginning of each year. CTC’s tax rate is 40 percent. Should the firm lease or buy?
4). Usne Millers is considering the acquisition of a new milling machine for their operations. The machine may be purchased outright or leased. The Purchase Option Cash purchase 500 000 Annual software license costs 6 000 Maintenance Costs Year 1 and year 2 4 000 per year Year 3 7 000 Year 4 13 000 The machine will be sold after 4 years for 10% of its cash purchase price The Leasing Option An initial deposit of R50 000 is required and the lease will run for 4 years. Annual payments of R100 000 need to be made at the end of each of the four years. On expiry of the 4th year the deposit will be refunded. No other costs will be borne by Usne Millers. The rate of return is 14% Ignore the effects of Taxation Required: 1. Determine the present value of cash flows associated with each alternative. 2 . Which option would you recommend to Usne Millers? Why?
Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corp. The machine can be used for 10 years and then sold for $10,000 at the end of its useful life. Lollie has presented Kiddy with the following options (EV of $1. PV of $1. EVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Buy machine. The machine could be purchased for $160,000 in cash. All insurance costs, which approximate $5,000 per year, would be paid by Kiddy 2. Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $25,000 with the first payment due immediately. All insurance costs will be paid for by the Lollie Corp. and the machine will revert back to Lollie at the end of the 10- year period Required: Assuming that a 12% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs…
. The Randolph company has decided to acquire a new truck. One alternative is to lease the truck on a 4 year guideline contract for a lease payment of $10,000 per year, with payments to be made at the end of each year. The lease would include maintenance. Alternatively, the company could purchase the truck outright for $40,000 (depreciated under Straight Line Method), financing the purchase by a bank loan for the net purchase price and amortizing the loan over a 4-year period at an interest rate of 10% per year. Under the borrow to purchase arrangement, the company would have to maintain the truck at a cost of $1,000 per year, payable at year end. It has residual value of $10,000, which is the expected market value after 4 years, when the company plans to replace the truck irrespective of whether it leases or buys. The tax rate is 40%. So what is the company's PV cost of leasing? What is the company's PV cost of owning? Should the truck be leased or purchased?
A company is considering two alternatives with regards to equipment which it needs. The alternatives are as follows: Alternative A:PurchaseCost of Equipment 700,581Salvage Value 105,896Daily operating cost 534Economic life, years 10 Alternative B: Rental at 1,539 per day. At 18% interest, how many days per year must the equipment be in use if Alternative A is to be chosen.
1. Differential Analysis for a Lease-or-Sell Decision Inman Construction Company is considering selling excess machinery with a book value of $279,300 (original cost of $399,200 less accumulated depreciation of $119,900) for $276,600, less a 5% brokerage commission. Alternatively, the machinery can be leased to another company for a total of $283,600 for five years, after which it is expected to have no residual value. During the period of the lease, Inman Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $25,100. 2. Differential Analysis for a Discontinued Product A condensed income statement by product line for Crown Beverage Inc. indicated the following for King Cola for the past year: Sales $234,500 Cost of goods sold 112,000 Gross profit $122,500 Operating expenses 143,000 Loss from operations $(20,500) It is estimated that 16% of the cost of goods sold represents fixed factory overhead costs and that 18% of the…
Reynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 10% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. What will RC report as an interest expense at Year 1? Round your answer to the nearest cent. Enter your…
Reynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. $ What will RC report as an interest expense at Year 1? Round your answer to the nearest cent.…
Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corp. The machine can be used for 9 years and then sold for $13,000 at the end of its useful life. Lollie has presented Kiddy with the following options: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Buy machine. The machine could be purchased for $163,000 in cash. All insurance costs, which approximate $8,000 per year, would be paid by Kiddy. 2. Lease machine. The machine could be leased for a 9-year period for an annual lease payment of $28,000 with the first payment due immediately. All insurance costs will be paid for by the Lollie Corp. and the machine will revert back to Lollie at the end of the 9-year period. Required:Assuming that a 9% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs…

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