A Filipino contractor in the USA plans to purchase a new office building costing P1,000,000. He agrees to pay P150,000 annually for 20 years. At the end of this time, he estimates that he can resell the building for at least P600,000. Instead of buying the building he can lease it for P140,000 a year. All payments are to. be made at the beginning of each year and the rate of interest is 10%. Draw the cashflow diagram for both situations. a) What is the present worth of the purchasing price? b) What is the present worth of the leasing price? c) Should the contractor purchase or lease the building?

A Filipino contractor in the USA plans to purchase a new office building costing P1,000,000. He agrees to pay P150,000 annually for 20 years. At the end of this time, he estimates that he can resell the building for at least P600,000. Instead of buying the building he can lease it for P140,000 a year. All payments are to. be made at the beginning of each year and the rate of interest is 10%. Draw the cashflow diagram for both situations. a) What is the present worth of the purchasing price? b) What is the present worth of the leasing price? c) Should the contractor purchase or lease the building?

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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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?
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. $14,000
Intelledex, Inc., a robotics manufacturer based in Corvallis, Oregon, has won a bid to deliver robotics equipment to a Swiss automobile company. The bid is SF8 million. Intelledex will receive the entire SF8 million upon delivery of the equipment six months from now. The present spot rate for the Swiss franc is SF8.000/$, and the six-month forward rate is SF8.2000/$. Intelledex can borrow U.S. dollars at 12% per annum or Swiss francs at 17% per annum. Its opportunity cost of capital is 14% per annum. 1. Explain the various ways in which Intelledex could cover its foreign exchangeexposure. 2. What would the bread-even opportunity cost of capital have to be for them to beindifferent between the various alternatives?3. Explain how economic exposure might change the expected profitability of this order.
Engr. Cruz bought a gantry machine for erecting tall structures. It was invoiced from Japan including its cost, insurance and freight at 4,050,000. Brokerage, bank, other fees and duties, and permits amount to 150,000. At the end of 10 years, he expects to sell it at 90,000. The working hours of the gantry machine is 130,000 hours. At 12% interest rate, compare the book value at the end of 6 years by computing for it using the following methods. What do you observe from the results?Explain. A.) Straight Line Method B.) Sinking Fund Method
onca Co. is looking for financing to expand its laboratory and buys a patent for a new technology which it's going to use for the next 10 years. Ronca Co. agrees to pay $70,000 for the patent. Instead of paying cash for the patent, Ronca Co. issues a note for $100,000, which is payable in five annual installments of $20,000 each. Ronca Co. pays the seller $20,000 on the day of the contract signing. Which of the following is the amount of debt Ronca Co. is going to record in its accounting? A $20,000 B $80,000 C $100,000 D $70,000
Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a bank loan for 100% of the required amount. Alternatively, a Texas investment banking firm that represents a group of investors believes that it can arrange for a lease financing plan. Assume that these facts apply: The equipment falls in the MACRS 3-year class. Estimated maintenance expenses are $48,000 per year. The firm's tax rate is 34%. If the money is borrowed, the bank loan will be at a rate of 12%, amortized in six equal installments at the end of each year. The tentative lease terms call for payments of $280,000 at the end of each year for 3 years. The lease is a guideline lease. Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance. Sadik must use the equipment if it is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms it can purchase the…
MANUAL SOLUTIONS NOT EXCELDOWNVOTE IF EXCELA Filipino contractor in the USA plans to purchase a new office building costing P1,000,000. He agrees to pay P150,000 annually for 20 years. At the end of this time, he estimates that he can resell the building for at least P600,000. Instead of buying the building he can lease it for P140,000 a year. All payments are to. be made at the beginning of each year and the rate of interest is 10%.Draw the cashflow diagram for both situations.a) What is the present worth of the purchasing price?b) What is the present worth of the leasing price?c) Should the contractor purchase or lease the building?
A chemical facility is considering purchasing a new compressor. The price of the compressor is $18500, the sales tax is 8%, and the anonymous fee costs $450. An investor offered to finance 90% of the price of the compressor for 48 months at a nominal interest rate of 9% per year, compounded monthly. A deal is obtained between the investor and facility for the finance of 90% of the price of the compressor. a) How much money does the facility need to pay at the time it purchases the compressor? b) How much is the monthly payment of facility to investor?
A self-employed chemical engineer is on contract with Dow Chemical, currently working in a relatively high-inflation country. She wishes to calculate a project’s Present Worth with estimated costs of Php1,350,000 now and Php120,000 per year for 5 years beginning 1 year from now with increases of 12% per year thereafter for the next 8 years. Use a real interest rate of 15% per year to make the calculations (a) without an adjustment for inflation and (b) considering inflation at a rate of 11% per year.
Acme Bricks, a masonry products company, wants to have Php 600 000 on hand before it invests in new conveyors, trucks, and other equipment. If the company sets aside Php 80 000 per year in an account that increases in value at a rate of 15 % per year, how many years will it be before Acme can purchase the equipment? A. 3.2 years B. 4.6 years C. 6.3 years D. 5.4 years
You are the purchasing agent for Air France and you are planning to purchase 10 airplanes from Boeing. The planes cost $100 million each and will not be delivered for three years. The contract states that payment will be in US dollars upon delivery. At the time the order was placed, the Euro was valued at $1.15. You anticipate the Euro will be valued at $1.45 at the time of delivery. Is this a good deal for Air France or not? Explain in terms of how much Air France will pay in US dollars at the time of delivery.
You are in discussions to purchase an option on an office building with a strike price of $63 million. The building is currently valued at $60 million. The option will allow you to purchase the building either six months from today or one year from today. Six months from today, accrued rent [ayments from the building in the amount of $900,000 will be made to the owners. If you exercise the option in six months, you will receive the accrued rent payment. Otherwise, the payment will be made to the current owners. A second accrued rent payment of $900,000 will be paid one-year from today with the same payment terms. The standard deviation of the value of the building is 30 percent, and the risk-free rate is a 6 percent annual percentage rate. What is the price of the option today using six-month steps? (Hint: The value of the building in six months will be reduced by the accrued rent payment of ou do not exercise the option at the time