Concept explainers
Lease or Buy High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $80,000 for five years, due at the beginning of each year. This machine will save Farmer $29,000 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $365,000. This machine will save $32,000 (1 per year in electricity costs. A local bank has offered to finance the machine with a $365,000 loan. The interest rate on the loan will be 10 percent on the remaining balance and will require five annual principal payments of $73,1100. Farmer has a target debt-to-asset ratio of 67 percent. Farmer is in the 34 percent tax bracket. After five years, both machines will be worthless. The machines will be
- a. Should Farmer lease the IPM machine or purchase the more efficient BMC machine?
- b. Does your answer depend on the form of financing for direct purchase?
- c. How much debt is displaced by this lease?
Want to see the full answer?
Check out a sample textbook solutionChapter 21 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education