A granite company is planning to buy a fully automated granite cutting machine. If it is purchased under down payment, the cost of the machine is ETB 16,00,000. If it is purchased under installment basis, the company has to pay 25% of the cost at the time of purchase and the remaining amount in 10 annual equal installments of ETB 2,00,000 each. Suggest the best alternative for the company using the present worth basis at i = 18%, compounded annually.

A granite company is planning to buy a fully automated granite cutting machine. If it is purchased under down payment, the cost of the machine is ETB 16,00,000. If it is purchased under installment basis, the company has to pay 25% of the cost at the time of purchase and the remaining amount in 10 annual equal installments of ETB 2,00,000 each. Suggest the best alternative for the company using the present worth basis at i = 18%, compounded annually.

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...

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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?
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