please answer within 30 minutes. Lease or Buy Equipment (look to Self-Test Exercise 8.8 for example)The Smith are not sure whether they should buy or lease equipment. A five-year lease could be arrangedwith annual lease payments of $6,000, payable at the beginning of each year. The tax shield from leasepayments is available at year end. The company's tax rate is 25%. The equipment would cost $30,000and has a five-year expected lifespan, and no residual value is expected. If purchased, the asset wouldbe financed through a term loan at 15%. The loan calls for equal payments to be made at the end ofeach year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis overfive years.Required: Calculate the cash flows for each financing alternative. Which alternative is the mosteconomical?

A contract or arrangement whereby one party authorizes another party to use assets belonging to the…

Answered: Lease or Buy Equipment (look to…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 1P

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Your firm is considering leasing a new computer. The lease lasts for 4 years. The lease calls for 5 payments of $450 per year with the first payment occurring immediately. The computer would cost $5,900 to buy and would be depreciated using the straight-line method to zero salvage over 4 years. The firm can borrow at a rate of 7%. The corporate tax rate is 21%. What is the NPV of the lease?
Your landscaping company can lease a truck for $8800 a year (paid at year-end) for 5 years. It can instead buy the truck for $38000. The truck will be valueless after 5 years. The interest rate your company can earn on its funds is 6%. 1. present value of the lease - $37,068.80 2. is it cheaper to buy or lease? Lease 3. present value of the lease if the lease payments are an annuity due? $39292.93 4. is it now cheaper to buy or lease? Buy
Your landscaping company can lease a truck for $8,150.00 a year for 4 years. It can instead buy the truck for $23,388.56. The truck will be valueless after 4 years. a. What is the present value of the lease payments, If the interest rate your company can earn on its funds is 11.00%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value b. Is it cheaper to buy or lease? buy lease
2. The controller has asked you to consider three separate options that your firm has for getting a new software/computer system. The first option is to lease the system. The annual payment will be $15 million for the first year and it will grow at 5% a year. The lease contract is 5 years long. In this case, the lease expenses are operating and therefore would be tax-deductible. The second option is to buy the system for $38 million and depreciate it over 4 years, which is the expected life of the project. A third choice is to buy the system for $38 million and take it as an immediate expense. The system has an expected life of 4 years. If the tax rate is 40% and the cost of capital is 10%, estimate the equivalent annual costs of each option.
The smiths are not sure whether they should buy or lease equipment. A five year lease could be arranged with annual lease payment of 5000$ payable at beginning of each year. The tax shield from lease payment is available at year end. The company tax rate is 25%. The equipment would cost $25000 and has a five year expected lifespan, and no residual value is expected. if purchased, asset would be financed through a term loan at 12%. The loan calls for equally payment to be made at end of end year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis over five years. Required: 1. Calculate the cash flows for each financing alternate. 2. Which alternative is the most economical.
1. You have a choice of leasing a truck for six years at $9,000/year, paid at the end of each year, or buying the truck for $44,000. At the end of six years the truck would be worthless. The interest rate is 5.5%. Would you lease or buy? 2. A similar situation as #1: lease for $9,000/year, or buy for $44,000, but if you buy the truck, and pay to maintain the truck (e.g. change oil and other fluids, replace windshield wipers, belts, tires, etc.), which are $500/year, paid at the end of each year, then at the end of six years, the truck would be worth $2,000 and you could sell the truck. Would you lease or buy?
A firm can lease a truck for 4 years at a cost of $38,000 annually. The lease includes maintenance. The firm can instead buy a truck at a cost of $88,000, with annual maintenance expenses of $18,000. The truck has no salvage value at the end of 4 years. What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 10% Round your answer to the nearest dollar and report it without the $ symboli
Suppose you can buy a new Toyota corolla for $20000 and sell it for $12000 in third year. For simplication, assume you sell the car at the beginning of the third year but can keep driving it until the end of the third year. Alternatively you can lease the car for $300 per month for three years and return it at the end of the three years. For simplication, assume that lease payments are made yearly instead of monthly- i.e,, that they are $3600 per year and are made at the beginning of each of the three years. a. If the interest rate R is 4%, it is better to buy or lease? b. If the interest rate is 10%,it is better to buy or lease? c. At what interest rate would you be indifferent between buying and leasing the car in percent?
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the maximum lease payment that you would be willing to make?
EXERCISE 2: LEASING VERSUS BUYING You have two options: to buy or to lease a video store. Option 1: Purchase Year $300,000 80,000 Cost Additional cost Cash flow from operations Cash flow from operations Cash flow from operations Cash flow from operations Cash flow from operations Cash flow from operations Cash flow from operations Cash flow from operations Cash flow from operations Cash flow from operations 1 45,000 70,000 1 90,000 105,000 140,000 3 4. 6. 160,000 165,000 170,000 175,000 180,000 10 11 Cash flow from sale of business 400,000 If you want to make 25% on your money, should you buy the video store? To answer this question, calculate the following: 1. Net present value 2. Internal rate of return Option 2: Leasing Activate Go to Settin
Your landscaping company can lease a truck for $8,400 a year (paid at year-end) for 7 years. It can instead buy the truck for $44,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is it cheaper to buy or lease? c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Is it now cheaper to buy or lease? Your landscaping company can lease a truck for $8,400 a year (paid at year-end) for 7 years. It can instead buy the truck for $44,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round…
A physics lab is considering leasing a diagnostic scanner that costs $5,800,000, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for four years. Assume tax rate is 21% for the leasing company (lessor) and zero for the lab. The cost of borrowing is 8%. Over what range of lease payments will the lease be profitable for both lessee and lessor? handwrite please

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