EBK FINANCIAL MANAGEMENT: THEORY & PRAC
15th Edition
ISBN: 9781305886902
Author: EHRHARDT
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 19, Problem 4P
Summary Introduction
To determine: The NAL of the lease
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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 firm’s 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.
What is the cost of owning?
What is the cost of leasing?
What is the NAL of the lease?
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…
Big Sky Mining Company must install $1.5 million of new machinery in its Nevadamine. It can obtain a bank loan for 100% of the purchase price, or it can lease themachinery. 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, propertytaxes, and maintenance.(3) The firm’s tax rate is 25%.(4) The loan would have an interest rate of 15%. It would be nonamortizing, with onlyinterest 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, andthe 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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EBK FINANCIAL MANAGEMENT: THEORY & PRAC
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