Question 5 Tasty Pies is expanding its business and wants to open a new facility to make frozen pies, which requires a new automated pie maker. One such pie maker can be purchased for $300,000. Alternatively, it can be leased for $52,000 per year for seven years and lease rentals need to be paid annually in advance. The management informs you that the new pie maker can be fully depreciated to zero using the straight-line method over four years and that its scrap/residual value is expected to be $5,000 at the end of the lease. Tasty Pies has estimated that the appropriate after-tax opportunity cost of capital of the expansion is 19% per annum, and the net present value of the expansion is expected to $10,000. Tasty Pies pays tax at the rate of 30% and it can borrow funds at a before-tax rate of 11% per annum. All cash-flows have been quoted on a before-tax basis. Would you recommend that Tasty Pies buy or lease the pie maker? What is the incremental wealth associated with your decision? Show all of your work.

Question 5 Tasty Pies is expanding its business and wants to open a new facility to make frozen pies, which requires a new automated pie maker. One such pie maker can be purchased for $300,000. Alternatively, it can be leased for $52,000 per year for seven years and lease rentals need to be paid annually in advance. The management informs you that the new pie maker can be fully depreciated to zero using the straight-line method over four years and that its scrap/residual value is expected to be $5,000 at the end of the lease. Tasty Pies has estimated that the appropriate after-tax opportunity cost of capital of the expansion is 19% per annum, and the net present value of the expansion is expected to $10,000. Tasty Pies pays tax at the rate of 30% and it can borrow funds at a before-tax rate of 11% per annum. All cash-flows have been quoted on a before-tax basis. Would you recommend that Tasty Pies buy or lease the pie maker? What is the incremental wealth associated with your decision? Show all of your work.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 6P: New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its...

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