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: The machinery falls into the MACRS 3-year class. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. The firm's tax rate is 40%. The loan would have an interest rate of 15%. The lease terms call for $400,000 payments at the end of each of the next 4 years. Assume that Big Sky Mining has no use for the machine beyond the expiration of the lease, the machine has an estimated residual value of $250,000 at the end of the 4th year. What is the NAL of the lease? Answer by competing the following worksheet template. (Please refer to the lecture notes). NPV LEASE ANALYSIS Year After-tax cash flows from leasing Lease payment Tax savings from lease Net cash flow PV cost of leasing at 9% <-- (1-40 %) *15% After-tax cash flows from buying the asset Payment of principal Interest Tax savings from interest Tax Savings from depreciation Sales Price Tax on gain/loss Net cash flow PV cost of owning at 9% <-- (1-40%) *15% NPV criterion: NAL=PV cost of leasing-PV cost of buying Decision?? MACRS rates 0 (Leasing) (Borrowing & Buying) Lease or Buy 1 33% 2 45% 3 15% 4 7%
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: The machinery falls into the MACRS 3-year class. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. The firm's tax rate is 40%. The loan would have an interest rate of 15%. The lease terms call for $400,000 payments at the end of each of the next 4 years. Assume that Big Sky Mining has no use for the machine beyond the expiration of the lease, the machine has an estimated residual value of $250,000 at the end of the 4th year. What is the NAL of the lease? Answer by competing the following worksheet template. (Please refer to the lecture notes). NPV LEASE ANALYSIS Year After-tax cash flows from leasing Lease payment Tax savings from lease Net cash flow PV cost of leasing at 9% <-- (1-40 %) *15% After-tax cash flows from buying the asset Payment of principal Interest Tax savings from interest Tax Savings from depreciation Sales Price Tax on gain/loss Net cash flow PV cost of owning at 9% <-- (1-40%) *15% NPV criterion: NAL=PV cost of leasing-PV cost of buying Decision?? MACRS rates 0 (Leasing) (Borrowing & Buying) Lease or Buy 1 33% 2 45% 3 15% 4 7%
Chapter2: Financial Statements, Cash Flow, And Taxes
Section: Chapter Questions
Problem 14SP
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Transcribed Image Text:A
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14 NPV LEASE ANALYSIS
15 Year
16 After-tax cash flows from leasing
17 Lease payment
18 Tax savings from lease
19 Net cash flow
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22 After-tax cash flows from buying the asset
23 Payment of principal
24 Interest
PV cost of leasing at 9% <--(1-40%) *15%
B
25 Tax savings from interest
26 Tax Savings from depreciation
27 Sales Price
28 Tax on gain/loss
29 Net cash flow
30 PV cost of owning at 9% <--(1-40%) *15%
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32 NPV criterion:
33 NAL=PV cost of leasing-PV cost of buying
34 Decision??
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36 MACRS rates
0
(Leasing)
C
(Borrowing & Buying)
The loan would have an interest rate of 15%.
The lease terms call for $400,000 payments at the end of each of the next 4 years.
Assume that Big Sky Mining has no use for the machine beyond the expiration of the lease, the machine has an estimated residual value of $250,000 at the end of the 4th year.
What is the NAL of the lease? Answer by competing the following worksheet template. (Please refer to the lecture notes).
Lease or Buy
D
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:
The machinery falls into the MACRS 3-year class.
Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.
The firm's tax rate is 40%.
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33%
E
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45%
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3
15%
G
4
H
7%
J
K
L
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