Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 19.A, Problem 2Q
Summary Introduction
To determine: The present value of the lease
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A firm, whose cost of capital is 8 percent, may acquire equipment for $146,825 and rent it to someone for a period of five years.
Note: Although payment of rent is typically considered to be an annuity due, treat it as an ordinary annuity when completing this problem in a spreadsheet or when using present value factors.
If the firm charges $38,730 annually to rent the equipment, what are the net present value and the internal rate of return on the investment? Use Appendix D to answer the questions. Use a minus sign to enter negative values, if any. Round your answers for the net present value to the nearest dollar and for the internal rate of return to the nearest whole number.
NPV: $
IRR: %
Should the firm acquire the equipment?
The firm acquire the equipment as the net present value is , and the internal rate of return the firm's cost of capital.
If the equipment has no estimated residual value, what must be the minimum annual rental charge for the firm to earn the required 8…
Please answer all parts.
Question 1)
Purchase price: $395,000 Mortgage Amount: 80% LTV, 30 year fixed at 5% PAID ANNUALLY. Loan Origination expenses: 3% of total loan amount. NOI: $48,000 / Year Required return on investment (levered): 11% Expected price appreciation: 5% per year Selling Expenses: 4% Expected holding period: 2 Years
What is the levered cash flow at time 0?
What is the levered cash flow at time 1?
What is the before tax equity reversion (BTER)?
What is the total levered cash flow for time 2?
What is the levered IRR?
What is the present value of a 15 year investment amounting to Ᵽ 45,670 if the prevailing interest is 2.5%?
Based on Item No. 1 compute for the present value of Ᵽ 45,670 in 20, 22 and 25 years if the interest rates are 5.5%, 6.8% and 9.80% respectively.
Chapter 19 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - Prob. 2QCh. 19 - Prob. 1PSCh. 19 - Prob. 2PSCh. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - Prob. 7PSCh. 19 - APV Consider a project lasting one year only. The...
Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 10PSCh. 19 - Prob. 11PSCh. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - WACC How will Rensselaer Felts WACC and cost of...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - APV Consider another perpetual project like the...Ch. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 25PSCh. 19 - Prob. 26PS
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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.)arrow_forwardAn institutional lender is willing to make a loan for $1 million on an office building at a 6 percent interest (accrual) rate with payments calculated using an 4 percent pay rate and a 30-year loan term. (That is, payments are calculated as if the interest rate were 4% with monthly payments over 30 years.) After the first five years the payments are to be adjusted so that the loan can be amortized over the remaining 25-year term. Required: a. What is the initial payment? b. How much interest will accrue during the first year? c. What will the balance be after five years? d. What will the monthly payments be starting in year 6?arrow_forwardA lot purchased for $4,500 is held for five years and sold for $13,500. The average annual property tax is $45 and may be accounted for at an interest rate of 12%. The income tax rate on the long term capital gain is 15% of the gain. What is the rate of return on the investment if the allowance for inflation is treated at an average annual rate of 7%?arrow_forward
- Using the information provided, what transaction represents the best application of the present value of an annuity due of $1? A. Falcon Products leases an office building for 8 years with annual lease payments of $100,000 to be made at the beginning of each year. B. Compass, Inc., signs a note of $32,000, which requires the company to pay back the principal plus interest in four years. C. Bahwat Company plans to deposit a lump sum of $100.000 for the construction of a solar farm In 4 years. D. NYC Industries leases a car for 4 yearly annual lease payments of $12,000, where payments are made at the end of each year.arrow_forwardSuppose you sell a fixed asset for $109,000 when its book value is $129,000. If your company’s marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)? (Enter your answer as a whole number.)arrow_forwardAn investment will provide after-tax revenue of $22,336 per year for 7 years. What is the present value of this revenue stream assuming a discount rate of 5.25%?arrow_forward
- An investor owns a property that produces an NOI of $110,000 and has an annual debt service of $70,000 and the forecast of cost recovery and interest deductions are $38,427 and $58,593 respectively. The investor’s marginal tax rate is 35 percent. The investor’s projected cash flow after taxes is: A. $30,000 B. $35,457 C. $43,256 D. $25,821arrow_forwardconsider $175,000 as lease paymentarrow_forwardIn order to finance a new project, a company borrowed $4,000,000 at 8% per year with the stipulation that the company would repay the loan plus all interest at the end of one year. Assume the company’s effective tax rate is 39%. What was the company’s cost of debt capital (a) before taxes, and (b) after taxes? (c) Compare the calculated after-tax cost with the approximated cost using Equation [10.4].arrow_forward
- Assuming the leasehold yield is 2% above the freehold yield, calculate the Years Purchase (YP) dual rate for 10 years if the accumulative rate is 3% and that a comparable freehold property let at full market rent of $40,000 has just been sold for $500,000. Hint: Analyse the market yield from the comparable first and then use it to calculate the required YP. 4.3872 7.3625 6.1250 5.3410arrow_forwardBased on the information below, calculate the adjusted present value (APV), given that the project lifespan is 1 year and is being financed by 30% debt: Investment at t=0 € 33,000 Cashflow after yr1 € 39,600 Cost of capital (COC) 53% Cost of debt 43% Tax 33% a) The adjusted present value (APV) is: €-4325.31 b) The adjusted present value (APV) is: €-5307.69 c) The adjusted present value (APV) is: €-7117.65 d) The adjusted present value (APV) is: €-6135.26arrow_forwardSuppose an asset has a first cost of $8,000,a life of five years, a salvage value of $2,000 atthe end of five years, and a net annual before-taxrevenue of $2,500. The firm’s marginal tax rate is35%. The asset will be depreciated by three-yearMACRS.(a) Using the generalized cash flow approach, determine the cash flow after taxes.(b) Rework part (a), assuming that the entire investment would be financed by a bank loan at aninterest rate of 9%.(c) Given a choice between the financing methodsof parts (a) and (b), show calculations to justifyyour choice of which is the better one at an interest rate of 9%.arrow_forward
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