Western Trucking Company (a US based company) needs to expand its facilities. In order todo so, the firm must acquire a machine costing $80,000. The machine can be leased orpurchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The termsof lease and purchase plans are as follows.Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over fiveyears. The lessee will exercise its option to buy the asset for $20,000, to be paid along with thefinal 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.QUESTIONSa) Determine the after-cash outflow for Western Trucking under each alternative.a strawe.b) Find the present value the after- tax cash outflow for each alternative using the after taxcost of debt.SE Lec) Which alternative-lease or purchase would you recommend? Justify.

Answered: Western Trucking Company (a US based…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

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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. Qustion Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt.
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. Question Determine the after-cash outflow for Western Trucking under each alternative.
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…

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