Wonderful Company thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The cost of equity Is 12%, the pre-tax cost of debt is 8%, and the company’s target debt-equity ratio is .5. The company’s tax rate is 30%. a) What is the NPV of buying the press? Show your work. b) The equipment manufacturer if offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Wonderful Company accept the offer? Give reasons in support of your conclusion.
Wonderful Company thinks it may need a new color printing press. The press will cost $500,000 but will substantially reduce operating costs by $250,000 per year, before tax. The press has 30% CCA rate and will remain in its asset pool. The first CCA deduction is made in year 0. The press will operate for 4 years and then be worthless. The
a) What is the
b) The equipment manufacturer if offering to lease the press for 4 years for $112,000 a year, payable in advance i.e. at the beginning of the year. Should Wonderful Company accept the offer? Give reasons in support of your conclusion.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
