The CaseWestern Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing S80,000. Themachine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are asfollows.Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for$20,000, to be paid along with the final lease payment.Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on astraight-line basis for 5 years.QUESTIONSa) Determine the after-cash outflow for Western Trucking under each alternative.b) Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt.c) Which alternative-lease or purchase would you recommend? Justify.

Cash Flow Statement is a part of the Financial Statement of a company. It literally means a…

Answered: The Case Western Trucking Company (a US…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter19: Lease Financing

Section: Chapter Questions

Problem 7MC: (1) Assume that the lease payments were actually 280,000 per year, that Consolidated Leasing is also...

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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?
(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.)
Western Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt.
Western Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. QUESTIONS Determine the after-cash outflow for Western Trucking under each alternative. Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt. Which alternative-lease or purchase would you recommend? Justify.
Western Truckling Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires beginning of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 which will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. Since the firm own the asset, it has to bear maintenance cost of $3500 yearly. Determine the after-cash outflow for Western Trucking under each alternative.
The CaseWestern Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows.Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. Determine the after-cash outflow for Western Trucking under each alternative.
The CaseWestern Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows.Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. Which alternative-lease or purchase would you recommend? Justify.
The Case Western Truckling Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires beginning of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 which will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. Since the firm own the asset, it has to bear maintenance cost of $3500 yearly.Question Which alternative-lease or purchase would you recommend? Justify
The Case Western Truckling Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires beginning of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 which will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. Since the firm own the asset, it has to bear maintenance cost of $3500 yearly. QUESTIONS Determine the after-cash outflow for Western Trucking under each alternative. Find the present value the after- tax cash outflow for each alternative using the after…
Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease: The leasing arrangement requires beginning-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase: If the firm purchases the machine, its cost of $80,000 will be financed with a 14% loan amortised over 5-year period. The machine will be depreciated under MACRS using a 5-year recovery period. The firm will pay $2,000 per year at the beginning of the year for a service contract that covers all maintenance costs. The…
Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 21% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease: The leasing arrangement requires beginning-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option. Purchase: If the firm purchases the machine, its cost of $80,000 will be financed with a 14% loan amortised over 5-year period. The machine will be depreciated under MACRS using a 5-year recovery period. The firm will pay $2,000 per year at the beginning of the year for a service contract that covers all maintenance costs. The…
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…

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