Can anyone or everyone please help me… A co is considering a new machine. The machine can be bought for $600,000 and will be depreciated over 4yrs using straight line method. The book value at the end of 4yrs is $60,000. The fair market value at that time will be $40,000. The machine would be financed from the bank at a lending rate of 16%. Pymts on the amortized loan once a yer for 4yrs. Maintainence costs would be $40,000. Leasing the machine would require an initial downpayment of $100,000 plus annual lease pymts of $170,000, at the end of each of the next 4yrs i.e. is 5 pymts. The lease provides for maintenance. An analysis of the project reveals its internal rate of return is 25%. The co is faced with a marginal tax rate of 25% and a marginal cost of capital of 18%. a) Determine the present value cost for each alternative financing option? b) Should the co lease or borrow from the bank and buy the machine? Explain. Please show all calculations.
Do your own school work.
The reason I am asking is because i am having trouble to complete the calculations. I am asking for assistance. I am almost 100% sure you did not get where you are without assistance.
I did ask for assistance (a lot) but this sounds like an assignment question. Ask your classmates or your prof. Or ask for help on the specific calculation or specific area logic you’re having a problem with, dont’ ask us to do the entire question. If you have a specific area you’re confused with, then ask that and you’ll be much more likely to recieve help on that, dare i say it one more time, specific area.
I think you are missing the lease rate in the problem. Strike does have a point - you really should at least show your own calculations and indicate where you hit the bottle neck. Anyways, if you assume that leasing rate is 25% then all of my calculations for leasing option that are done at 18% are correct as you need to pick the lowest of leasing rate or your cost of capital: Purchase option (discounted at 16%): Leasing Option (at lowest of lease rate or cost of capital): Purchase Price: 600,000 Downpayment: 100,000 Depreciation life (years): 4 Lease pmts (5 in total): 170,000 including maint Book Value - y.4: 60,000 Market Value - y.4: 40,000 Tax Credit on capital loss: 5000 Corporate Tax 25% Maintenane: 40,000 Depreciation expense - per year: 135,000 CAA tax shield: 33,750 Total Cost (discounted): -614,727 Total Cost (discounted): -727,311 Year 0 CF: -600,000 Year 0 CF: -270,000 Year 1 CF (undiscounted): -6,250 Year 1 CF (undiscounted): -170,000 Year 1 CF (discounted): -5,388 Year 1 CF (discounted): -144,068 Year 2 CF (undiscounted): -6,250 Year 2 CF (undiscounted): -170,000 Year 2 CF (discounted): -4,645 Year 2 CF (discounted): -122,091 Year 3 CF (undiscounted): -6,250 Year 3 CF (undiscounted): -170,000 Year 3 CF (discounted): -4,004 Year 3 CF (discounted): -103,467 Year 4 CF (undiscounted): -1,250 Year 4 CF (undiscounted): -170,000 Year 4 CF (discounted): -690 Year 4 CF (discounted): -87,684
Thanks. But I think I did not choose the lowest of the leasing rate at 25% but at 18%.
If you consider lease rate to be 18% and company WACC to be at 18% as well then that’s the rate your should use. However, if the lease rate and purchase rate is 16% and company WACC is 18% you need to use 16% - the lowest of two.