Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machinecosting $200,000. The machine can be leased or purchased. The firm is in the 27% tax bracket, and itsafter-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows:LeaseThe leasing arrangement requires end-of-year payments of $59,000 over five years. Allmaintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. Thelessee will exercise its option to purchase the asset for $20,000 at termination of the lease. Ignore anyfuture tax benefit associated with the purchase of the equipment at the end of year 5 under the leaseoption.Purchase If the firm purchases the machine, its cost of $200,000 will be financed with a five-year,17% loan requiring equal end-of-year payments of $62,513. The machine will be depreciated underMACRS using a 5-year recovery period. (See LOADING... for the applicable depreciationpercentages.) The firm will pay $1,000 per year for a service contract that covers all maintenance costs;insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use itbeyond its five-year recovery period.a.Determine the after-tax cash outflows of Northwest Lumber under each alternative.The after-tax cash outflow associated with the lease in years 1 through 4 is $b.Find the present value of each stream, using the after-tax cost of debt.Which alternative-lease or purchase-would you recommend?

Present value illustrates the current value of a sum of money that will be received or paid in the…

Answered: a. Determine the after-tax cash…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter19: Lease Financing

Section: Chapter Questions

Problem 6P: Big Sky Mining Company must install 1.5 million of new machinery in its Nevada mine. It can obtain a...

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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. (1) The machinery falls into the MACRS 3-year class. (2) Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. (3) The firms tax rate is 25%. (4) The loan would have an interest rate of 15%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4. (5) The lease terms call for 400,000 payments at the end of each of the next 4 years. (6) Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of 250,000 at the end of the 4th year. a. What is the cost of owning? b. What is the cost of leasing? c. What is the NAL of the lease?
Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease: The leasing arrangement requires beginning-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase: If the firm purchases the machine, its cost of $80,000 will be financed with a 14% loan amortised over 5-year period. The machine will be depreciated under MACRS using a 5-year recovery period. The firm will pay $2,000 per year at the beginning of the year for a service contract that covers all maintenance costs. The…
Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease: The leasing arrangement requires beginning-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase: If the firm purchases the machine, its cost of $80,000 will be financed with a 14% loan amortised over 5-year period. The machine will be depreciated under MACRS using a 5-year recovery period. The firm will pay $2,000 per year at the beginning of the year for a service contract that covers all maintenance costs. The…
Bird Wing Bedding can lease an asset for 4 years with payments of $24,000 due at the beginning of the year. The firm can borrow at a 9% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar.
Bird Wing Bedding can lease an asset for 4 years with payments of $16,000 due at the beginning of the year. The firm can borrow at a 6% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing?
ANB Leasing is planning to lease an asset costing $210,000. The lease period will be 6 years. At the end of 6 years, the salvage value is estimated to be $30,000. The asset will be depreciated on a straight-line basis of $30,000 per year over the 6-year period. ANB's marginal income tax rate is 40%, but its average tax rate is only 31.5%. Assuming ANB Leasing requires a 12% after-tax rate of return on the lease, determine the required annual beginning of the year lease payments. a. $31,592 b. $46,120 c. $45,609 d. $52,653
Findley Furniture Company must install $6.1 million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply: The equipment falls in the MACRS 5-year class. The applicable MACRS rates are 19%, 34%, 18%, 13%, 12%, and 4%. The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for $160,000 per year, payable at the end of the year. Findley’s federal-plus-state tax rate is 30%. If the money is borrowed, the bank loan will be at a rate of 8%, amortized in 5 equal installments to be paid at the end of each year. The tentative lease terms call for end-of-year payments of $1.40 million per year for 5 years. At the end of the lease term, the equipment will have an estimated salvage value of $950,000. At that time, Findley plans to replace the equipment regardless of whether the firm…
Hull Manufacturing Co. must decide whether to purchase or lease a new piece of equipment. The equipment can be leased for $4,000 a year or purchased for $15,000. The lease includes maintenance and service. The salvage value of the equipment at the end of five years is $5,000. If the equipment is owned, service and maintenance charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing would you choose? Use the following capital cost allowance amounts. Year Amount $4,500 3,150 2,205 1,543 1,081 2 3 4
JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 27% tax bracket, and its after-tax cost of debt is currently 9%. The terms of the lease and of the purchase are as follows: Lease: Annual end-of-year lease payments of $30,000 are required over the three-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $3,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 3 under the lease option. Purchase: The equipment costs $70,000 and can be financed with a 14% loan requiring annual end-of-year payments of $30,151 for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. JLB will pay $2,200 per year for a service contract that covers all maintenance costs;…
JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 23% tax bracket, and its after-tax cost of debt is currently 9%. The terms of the lease and of the purchase are as follows: Lease: Annual end-of-year lease payments of $30,000 are required over the three-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $6,500 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 3 under the lease option. Purchase: The equipment costs $70,000 and can be financed with a 15% loan requiring annual end-of-year payments of $30,658 for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. ((See TABLE below) for the applicable depreciation percentages.) JLB will pay $2,600 per year…
Brambles Inc is looking to acquire a new equipment for its project that will last for eight years. The after-tax required rate of return of the project is 16% per annum. Brambles can borrow at a before-tax interest rate of 8.5% per annum and buy the equipment outright or lease the equipment from ABC's Leasing. Brambles has evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease is calculated to be -$12,000. However, the purchase cost of the equipment was under- estimated by $24,000, also the salvage value of the equipment at the end of the lease term was under- estimated by $8,000. The applicable corporate tax rate is 30% and the equipment is going to be fully depreciated over the eight years using a straight-line method. Will Brambles' decision be affected by adjusting the purchasing cost and salvage value? O It is now indifferent between lease and borrow-to-buy. The equipment should still be purchased by borrowing. None of the other answers is…
Western Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires BEGINNING of year payment of S16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5- year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. QUESTIONS| a) Determine the after-cash outflow for Western Trucking under each alternative. b) Find the present value the after- tax cash outflow for each alternative using the ater tax cost of debt. c) Which alternative-lease or purchase would you recommend? Justify.

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a. Determine the after-tax cash outflows of Northwest Lumber under each alternative. The after-tax cash outflow associated with the lease in years 1 through 4 is $ b. Find the present value of each stream, using the after-tax cost of debt. Which alternative-lease or purchase-would you recommend? C.