Concept explainers
Lease or Buy Wolfson Corporation has decided to purchase a new machine that costs $2.8 million. The machine will be
- a. Should Wolfson lease the machine or buy it with bank financing?
- b. What is the annual lease payment that will make Wolfson indifferent to whether it leases the machine or purchases it?
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UPENN: LOOSE LEAF CORP.FIN W/CONNECT
- Electro Corporation bought a new machine and agreed to pay for it in equal annual installments of 5,000 at the end of each of the next 5 years. Assume a prevailing interest rate of 15%. The present value of an ordinary annuity of 1 at 15% for 5 periods is 3.35. The future amount of an ordinary annuity of 1 at 15% for 5 periods is 6.74. The present value of 1 at 15% for 5 periods is 0.5. How much should Electro record as the cost of the machine? a. 12,500 b. 16,750 c. 25,000 d. 33,700arrow_forwardBig 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?arrow_forwardUsing 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_forward
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- ABC Date Enterprise takes out a $40,000 loen to finance the purchase of new physical capital. It must repay the loan in full with interest in one year. The interest rate is 8 percent and the applicable corporate tax rate is 40 percent. What is the present value savings from the deductibility of the interest payment from ABC Date Enterprise's toxes? NOTE: Please round your numeric answer to the nearest dolliar. Do not enter the dollar sign or any commas.arrow_forwardKillion Company needs to purchase new equipment, but does not have enough cash to purchase it outright. Therefore, on 1/1/21, Killion finances the purchase of the equipment by borrowing $29,000 on a 4-year, 5% installment loan. The loan specifies that Killion needs to make 4 payments of $8,178 once a year for the next four years. Each installment payment goes towards both accrued interest and the principal on the loan. Each installment payment is made on December 31. repare the journal entries for Killion to record the note's issuance and the first installment payment. (Round your intermediate alculations and final answers to the nearest dollar amount.) View transaction list Journal entry worksheet of 33 ― Next >arrow_forwardA property is available for sale that could normally be financed with a fully amortizing $82,000 loan at a 10 percent rate with monthly payments over a 25-year term. Payments would be $745.13 per month. The builder is offering buyers a mortgage that reduces the payments by 50 percent for the first year and 25 percent for the second year. After the second year, regular monthly payments of $745.13 would be made for the remainder of the loan term. Required: a. How much would you expect the builder to have to give the bank to buy down the payments as indicated? b. Would you recommend the property be purchased if it was selling for $5,000 more than similar properties that do not have the buydown available? Complete this question by entering your answers in the tabs below. Required A Required B How much would you expect the builder to have to give the bank to buy down the payments as indicated? Note: Do not round intermediate calculations. Round your final answer to 2 decimal places. Down…arrow_forward
- Red Bull F1 plans to purchase or lease $277,764 worth of equipment. Ifpurchased, the equipment will be depreciated on a straight-line basis overfive years, after which it will be worthless. If leased, the annual leasepayments will be $42,922 per year at the end of every year for five years.Assume Red Bull F1's borrowing cost is 8%, the tax rate is 35%, and thelease qualifies as a true tax lease.If Red Bull F1 purchases the equipment, what is the amount of the lease equivalent loan?arrow_forwardA property is available for sale that could normally be financed with a fully amortizing $80,600 loan at a 10 percent rate with monthly payments over a 25-year term. Payments would be $732.41 per month. The builder is offering buyers a mortgage that reduces the payments by 50 percent for the first year and 25 percent for the second year. After the second year, regular monthly payments of $732.41 would be made for the remainder of the loan term. Required: a. How much would you expect the builder to have to give the bank to buy down the payments as indicated? b. Would you recommend the property be purchased if it was selling for $5,000 more than similar properties that do not have the buydown available? Complete this question by entering your answers in the tabs below. Required A Required B How much would you expect the builder to have to give the bank to buy down the payments as indicated? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Down…arrow_forwardA property is available for sale that could normally be financed with a fully amortizing $81,200 loan at a 10 percent rate with monthly payments over a 25-year term. Payments would be $737.87 per month. The builder is offering buyers a mortgage that reduces the payments by 50 percent for the first year and 25 percent for the second year. After the second year, regular monthly payments of $737.87 would be made for the remainder of the loan term. Required: a. How much would you expect the builder to have to give the bank to buy down the payments as indicated? b. Would you recommend the property be purchased if it was selling for $5,000 more than similar properties that do not have the buydown available? Complete this question by entering your answers in the tabs below. Required A Required B How much would you expect the builder to have to give the bank to buy down the payments as indicated? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Down…arrow_forward
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