A businessman plans to purchase a new house costing P 500 000. He can raise the building by issuing a 10%, 25-year-old bond that would pay P 150 000 interest per year and repay the face amount at maturity. Instead of buying the new house, he has the option of leasing it for P 140 000 per year, the first payment due one year from now. The building has an expected life for 25 years. If the interest charge for leasing is 8%, which is more favorable for the businessman, borrow and buy or lease?

A businessman plans to purchase a new house costing P 500 000. He can raise the building by issuing a 10%, 25-year-old bond that would pay P 150 000 interest per year and repay the face amount at maturity. Instead of buying the new house, he has the option of leasing it for P 140 000 per year, the first payment due one year from now. The building has an expected life for 25 years. If the interest charge for leasing is 8%, which is more favorable for the businessman, borrow and buy or lease?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 8MC: Grummet Company is acquiring a new wood lathe with a cash purchase price of $80,000. The Wood Master...

See similar textbooks

Similar questions

Grummet Company is acquiring a new wood lathe with a cash purchase price of $80,000. The Wood Master Industries (the manufacturer) has agreed to accept $23,500 at the end of each of the next 4 years. Based on this deal, how much interest will Grummet pay over the life of the loan? A. $94,000 B. $80,000 C. $23,500 D. $14,000
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?
Using the information provided, what transaction represents the best application of the present value of an annuity due of $1? A. Falcon Products leases an office building for 8 years with annual lease payments of $100,000 to be made at the beginning of each year. B. Compass, Inc., signs a note of $32,000, which requires the company to pay back the principal plus interest in four years. C. Bahwat Company plans to deposit a lump sum of $100.000 for the construction of a solar farm In 4 years. D. NYC Industries leases a car for 4 yearly annual lease payments of $12,000, where payments are made at the end of each year.
Bouvier Restaurant is considering an investment in a grill that costs $140,000, and will produce annual net cash flows of $21,950 for 8 years. The required rate of return is 6%. Compute the net present value of this investment to determine whether Bouvier should invest in the grill.
Washington-Pacific (W-P) invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return?
A businessman plans to purchase a new house costing P500000. He can raise the building by issuing a 10%, 25 year old bond that would pay P150000 interest per year and repay the face amount at maturity Instead of buying the new house, he has the option of leasing it for P140000 per year, the first payment due one year fron now. The building has an expected life for 25 years, If interest charge for leasing is 8%, which is more favorable for the businessman, borrow and buy or lease?
A builder is offering $117,767 loans for his properties at 9 percent for 25 years. Monthly payments are based on current market rates of 9.5 percent and are to be fully amortized over 25 years. The property would normally sell for $130,000 without any special financing. Required: a. At what price should the builder sell the properties to earn, in effect, the market rate of interest on the loan? Assume that the buyer would have the loan for the entire term of 25 years. b. At what price should the builder sell the properties to earn, in effect, the market rate of interest on the loan if the property is resold after 10 years and the loan repaid?
The cost to purchase the house that Bainters are considering is $195,000, but the Bainters plan to make a $40,000 down payment. The Bainters have been approved for a fixed-rate, 30-year mortgage with a 4.2% annual interest rate for the remaining costs. They want to know how much they would pay on their loan each year as well as how much they would pay on their loan after 5 years, 10 years, 15 years, and 30 years. They also want to determine how much they would pay in interest on their loan when they repay the entire loan. What are the amounts? remember to show or explain your calculations) the total amount paid in loan payments after 1year the total amount paid in loan payments after 5years the total amount paid in loan payments after 10 years the total amount paid in loan payments after 15 years the total amount paid in loan payments after 30 years