National Co. is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: After-tax cash flow Lease -64,329 -64,329 -64,329 -64,329 64,329 End of year Purchase -68,454 -59,110 -63,596 -66,633 30,056 1 3 4

National Co. is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: After-tax cash flow Lease -64,329 -64,329 -64,329 -64,329 64,329 End of year Purchase -68,454 -59,110 -63,596 -66,633 30,056 1 3 4

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 17E: Postman Company is considering two independent projects. One project involves a new product line,...

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(1) Assume that the lease payments were actually 280,000 per year, that Consolidated Leasing is also in the 25% tax bracket, and that it also forecasts a 200,000 residual value. Also, to furnish the maintenance support, it would have to purchase a maintenance contract from the manufacturer at the same 20,000 annual cost, again paid in advance. Consolidated Leasing can obtain an expected 10% pre-tax return on investments of similar risk. What are its NPV and IRR of leasing under these conditions? (2) What do you think the lessors NPV would be if the lease payment were set at 260,000 per year? (Hint: The lessors cash flows would be a mirror image of the lessees cash flows.)
Postman Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of forklifts for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: Required: Compute the after-tax cash flows of each project. The tax rate is 40 percent and includes federal and state assessments.
Use the following information for the next two problems: Barton Aviation is considering whether to lease or purchase an aircraft to transport its executives between company facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: Cash Flows After-Tax End of Year Lease (cash flows are all negative) PurchaseYrs 1-4 cash flows are negative; Year 5 is positive. 1. (40,000) (68,454) 2. (40,000) (59,110) 3. (40,000) (63,596) 4. (40,000) (66,633) 5. (40,000) 30,056 Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt. Given the above cash outflows: a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost…
Use the following information for the next two problems: A company is considering whether to lease or purchase an aircraft to transport its executives between company facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: Cash Flows After-Tax End of Year Lease (cash flows are all negative) PurchaseYrs 1-4 cash flows are negative; Year 5 is positive. 1. (40,000) (68,454) 2. (40,000) (59,110) 3. (40,000) (63,596) 4. (40,000) (66,633) 5. (40,000) 30,056 1. Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt. 2. Given the above cash outflows: a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost…
Use the following information for the next two problems: Top management of Markel Company is considering whether to lease or purchase an aircraft to transport them around the country. They are in the 40 percent tax bracket and their after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below. (The Year 5 purchase cash flow is positive since they rent out the aircraft for part of that year.) End of Year Lease (cash flows are all negative) PurchaseYrs 1-4 cash flows are negative; Year 5 is positive. 1. (40,000) (68,454) 2. (40,000) (59,110) 3. (40,000) (63,596) 4. (40,000) (66,633) 5. (40,000) 30,056 Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt. Given the above cash outflows: a) Calculate the present value of the after-tax cash flows of the…
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Guardian Incorporated is trying to develop an asset-financing plan. The firm has $390,000 in temporary current assets and $290,000 in permanent current assets. Guardian also has $490,000 in fixed assets. Assume a tax rate of 40 percent. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan. Given that Guardian’s earnings before interest and taxes are $270,000, calculate earnings after taxes for each of your alternatives. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?
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Beemer Construction Company is considering selling excess machinery with a bookvalue of $280,000 (original cost of $400,000 less accumulated depreciation of$120,000) for $221,000, less a 5% brokerage commission. Alternatively, the machinerycan be leased for a total of $216,000 for five years, after which it is expected to haveno residual value. During the period of the lease, Eclipse Construction Company'scosts of repairs, insurance, and property tax expenses are expected to be $14,200. Prepare and show in solution a differential analysis, dated April 16 to determinewhether Beemer should lease (Alternative 1) or sell (Alternative 2) the machinery