PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 25, Problem 12PS
a.
Summary Introduction
To determine: The value of equivalent loan
b.
Summary Introduction
To determine: The value of lease payment
c.
Summary Introduction
To determine: Whether the company need to invest if the machine’s
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Firm A is considering leasing equipment. The equipment will provide $2.8 million in annual pre-tax cost savings. The cost of leasing is $8.78 million and the equipment will be depreciated straight-line to zero over five years. Assume a tax rate of 21% and a borrowing rate of 7%. Firm B has offered to lease this equipment for payments of $1.95 million per year. Assume that payments for the lease are made at the start of the year.
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Chapter 25 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Operating leases Acme has branched out to rentals...Ch. 25 - Prob. 9PSCh. 25 - Prob. 10PSCh. 25 - Technological change and operating leases Look at...
Ch. 25 - Prob. 12PSCh. 25 - Taxes and leasing Look again at the bus lease...Ch. 25 - Taxes and leasing In Section 25-4 we showed that...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Prob. 18PSCh. 25 - Valuing leases The Safety Razor Company has a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 22PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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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_forwardMontclair Manufacturing is considering leasing some equipment. The annual lease payment would be $505,000 per year for nine years. The appropriate interest rate is 7 percent and the company is in the 25 percent tax bracket. What reduction in debt capacity would occur if the company signs the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)arrow_forwardNet advantage to leasing (NAL) ABC Corp is considering a leasing arrangement to finance some machinery it needs for the next 3 years. The depreciation schedule and salvage value are given below. It can borrow $5,000,000, the purchase price, at 10% and buy the machinery, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year (the loan will be repaid in full in 3 years). The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $250,000 (paid at the end of the year), but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL)?arrow_forward
- Lease versus Buy Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a 6-year bank loan for 100% of the cost at a 15% interest rate with equal payments at the end of each year. Sadik’s tax rate is 25%. The equipment falls in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) Alternatively, a Texas investment banking firm that represents a group of investors can arrange a guideline lease calling for payments of $320,000 at the end of each year for 3 years. Under the proposed lease terms, the Sadik 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 machinery at its fair market value at Year 3. The best estimate of this market value is $170,000, but it could be much…arrow_forwardTask: evaluate the payoffs from buying the asset versus using it on a lease arrangement. Given: The equipment costs €2000 000 Interest rate on debt 8%. Depreciation MARCS (Modified Accelerated Cost Recovery Sys): 35% first year; 40% second year, 15% third year; and 10% fourth year. Marginal tax rate = 30%. If the firms buys the equipment, there is a four year maintenance cost of €30 000 payable at the beginning of each year. If the equipment is leased: Firm could obtain a 4-year lease which includes maintenance. Rental payment would be €500,000 at the beginning of each year. Residual (salvage) value at t = 4: €200,000.arrow_forwardLease versus Buy Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a 6-year bank loan for 100% of the cost at a 14% interest rate with equal payments at the end of each year. Sadik’s tax rate is 25%. The equipment falls in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) Alternatively, a Texas investment banking firm that represents a group of investors can arrange a guideline lease calling for payments of $320,000 at the end of each year for 3 years. Under the proposed lease terms, the Sadik 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 machinery at its fair market value at Year 3. The best estimate of this market value is $200,000, but it could be much…arrow_forward
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