QUESTION 4CBC Ltd. wishes to acquire a K100,000 brick making machine which has auseful life of eight years. At the end of this time, the machine's scrap valuewill be K8,000. The asset will be depreciated using the straight line methodover its eight-year life. The company can use either lease or debt financing.Lease payment of K16,000 at the beginning of each of the eight years wouldbe required. If debt financed, the interest rate would be 14 percent anddebt payments would be due at the beginning of each of the eight years.(Interest would be amortized as a mortgage-type of debt instrument.) Thecompany is in the 40 percent tax bracket. Which method of financing hasthe lower present value of cash outflows?

The question is based on the concept of capital budgeting techniques to select the most appropriate…

Answered: CBC Ltd. wishes to acquire a K100,000…

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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complete question XYZ Builders Ltd. need to acquire the use of a crane for their construction business and are considering buying or leasing a crane. The crane costs Rs.10000 subject to SLM depreciation with salvage value 0 at the end of 5 years. In contrast, the lease rent is Rs.3000 p.a. to be paid in advance each year for 5 years.XYZ Builders ltd can raise debt at 20% payable in equal annual instalments, each instalment due at the beginning of the year. Tax applicable in 35%. Should it lease or buy the asset?
Tripple A Manufacturing needs to acquire a piece of equipment which will cost the company $80,000. It is estimated that in six years’ time the equipment can be salvaged for $20,000. The company’s bank has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal installments over the six years. Alternatively, the machine could be leased over the six years from the manufacturer, by way of an operating lease with annual lease payments of $14,000. Triple A’s tax rate is 40 percent and its cost of capital is 15 percent. The equipment has a CCA rate of 20 percent. If the machine is owned, annual maintenance costs will be $500. Required: Advise Triple A which alternative they should choose, providing them with calculations to support your recommendation. NOTE: PLEASE DONOT SOLVE IN EXCEL
Finance Q.4- The Nail Inc. wishes to acquire a $100,000 wood cutting machine, which it plans to use for seven years. At the end of this time, the machine's residual value will be $24,000. The asset falls into the five-year property class for cost recovery (depreciation) purposes. The company can use either a "true" lease or debt financing. Lease payments of $16,000 at the beginning of each of the seven years would be required. If debt-financed, the interest rate would be 14 percent, and debt payments would be due at the beginning of each of the eight years. (Interest would be amortized as a mortgage- type of debt instrument.) The company is in a 40 percent tax bracket. Which method of financing has the lower present value of cash outflows?
Mauer Mining Company leases a special drilling press with annual payments of $100,000. The contract calls for rent payments at the beginning of each year for a minimum of 6 years. Mauer Mining can buy a similar drill for $490,000, but it will need to borrow the funds at 10%. a. Determine the present value of the lease payments at 10%. b. Should Mauer Mining lease or buy this drill?
Question 1 A construction firm must obtain a bulldozer to work on a long-term project. There are two options available to the firm - using a loan to purchase the bulldozer for $825,000 and leasing it from the equipment dealer. If the firm decides to purchase, it can finance the entire cost through a commercial bank for 8 years at an interest rate of 7.5% compounded annually. At the end of eight years, the firm will sell the bulldozer for a salvage value of $80,000. If the firm decides to lease, it will pay the equipment dealer an up-front fee equal to 5% of the purchase price, followed by eight annual payments of $135,000. At the end of the lease, the firm will return the equipment to the dealer. The firm's discount rate is 10%. a) Build an Excel worksheet to model the two options and help the firm decide which to choose. You can ignore depreciation or tax effects in your analysis (i.e., evaluate the options simply based on their respective cash flows). b) Assuming that the equipment…
Q. XYZ Builders need to acquire the use of a crane for construction business, and are considering buying or leasing a crane. The crane costs Rs. 1,000,000, and is subject to the straight-line method of depreciation to a zero salvage value at the end of 5 years. In contrast, the lease rent is Rs 220,000 per year to be paid at the end each year for 5 years. XYZ Builders can raise debt at 14% payable in equal annual instalments, each instalment due at the end of the year. The company is in the 50% tax bracket. Should it lease or buy the crane?
Q. XYZ Builders need to acquire the use of a crane for construction business, and are considering buying or leasing a crane. The crane costs Rs. 1,000,000, and is subject to the straight-line method of depreciation to a zero salvage value at the end of 5 years. In contrast, the lease rent is Rs 220,000 per year to be paid at the end each year for 5 years. XYZ Builders can raise debt at 14% payable in equal annual instalments, each instalment due at the end of the year. The company is in the 50% tax bracket. Should it lease or buy the crane? kindly solve this
On 1st January 2015, Trademart SAOG entered into an agreement to lease an item of plant from a manufacturer for 5 years. The lease requires five annual payments of RO 200,000 each commencing from 1st January 2016. The plant would have a useful life of five years and with no residual value. The present value of the total lease payments is OMR 840,000. The cost of capital used is 12% find the initial amount of lease liability right to use asset recognition in the first year in the boaks of lessee. ion Lease liability OMR 640,000 and right to use asset OMR 840,000 None of them Lease liability OMR 840,000 and right to use asset OMR 840,000 Lease liability OMR 640,000 and right to use asset OMR 640,000
Exercises 1. Grimstone Construction Company is considering selling excess machinery with a book value of $200,000 (original cost of $355,000 less accumulated depreciation of $155,000) for $205,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of $225,000 for four years, after which it is expected to have no residual value. During the period of the lease, Grimstone Construction Company's costs of repairs, insurance, and property tax expenses are expected to be $34,400. a. Prepare a differential analysis, dated November 30th to determine whether Grimstone should lease (Alternative 1) or sell (Alternative 2) the machinery. b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.
Q.6 An asset will cost $20 000 when purchased this year. It is further expected to have a salvage value of $2 000 at the end of its five year depreciable life. Determine: The depreciation and the book value for period 2 (using Straight Line) The depreciation and book value for period 4 (using the sinking fund method) with an interest rate of 10%, compounded annually. The depreciation and the book value for period 3 (using the declining balance method) by assuming 0.2 for (d). The depreciation and book value for period 2 (using the sum-of-the-years-digits method).
Question 4 Neptune company plans to purchase a new machine for the expansion project. The machine's price is RM200,000 and it would cost another RM20,000 for installation and RM 15,000 for net working capital. The company is planning to finance the machine's cost through bank loan with an interest rate of 8% per year. The machine has an expected life of 10 years and will be depreciated using simplified straight line depreciation method. However, the project is expected to be ended in year seven. The company expect that this new machine would increase the company's annual income of RM40,000 per year. The maintenance cost for the machine will be RM10,000 per year. Additionally, the use of this new machine is expected to reduce the defect cost by RM2,000 per year. At the end of year 7, this machine is expected to be sold at RM30,000. Assuming the tax rate is 28% and the required rate of return is 10%, find whether ABC should proceed with this planning. Justify your answer.
Question The product development department of Very Trusty plc is contemplating renting a factory building on a four-year lease from Year 1, investing in some new plant and using it to produce a new product, code named C15. Since there appears to be no possibility of the plant continuing to be economically viable beyond a four-year life, it has been decided to assess the new product over a four-year manufacturing and sales life. Under the lease the business will pay $100,000 annually in advance on 1 January. The plant is expected to cost $600,000. This will be bought and paid for in Year 0 and is expected to be scrapped (zero proceeds) on 31 December Year 4. The business will depreciate this asset, in its accounts, on a straight-line basis (25 per cent each year). Each unit of C15 is estimated to give rise to a variable labour cost of $200 and a variable material cost of $100. C15 manufacture will be charged with an annual share of the business’s administrative costs, totalling…

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