Question

Lease versus Buy 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: 1. The machinery falls into 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.) 2. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. 3. The firm's 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 $410,000 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 $200,000 at the end of the 4th year. a. What is the cost of owning? Enter your answer as a positive value. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should entered as 5,000,000. Round your answer to the nearest dollar. b. What is the cost of leasing? Enter your answer as a positive value. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar. c. What is the NAL of the lease? Do not round Intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar,

Answer 1

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X 2 E. Insert = Page Layout ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Formulas Data Review View - 2x % Cut Σ AutoSum : A Calibri Dr General -11AA = = = A Wrap Text Merge Merge & Center - Center BIU - D SF $ 4:0 .00 :.: Insert Delete Format % % , Number E Copy Paste Format Painter Clipboard DY439 Conditional Format Formatting as Table Styles Fill 2 Clear Cell Styles Sort & Filter Editing Find & Select Font Alignment Cells DR DE DU DV D W DX DY DZ EA - 0 2 4 1 -225000.00 56250.00 -225000.00 56250.00 3 -225000.00 56250.00 DS big sky NET CASH FLOW UNDER PURCHASE INTEREST COST (B) TAX SAVING ON INTEREST PRINCIPAL PAID (C) TAX SAVING FROM DEPRECIATION (DEPRECIATION X 25%) RESIDUAL VALUE OF PLANT TAX PAID ON SALE OF PLANT NET CASH FLOW PV FACTOR @15%(1-0.25) =11.25% NET CASH OUTFLOWS -225000.00 56250.00 -1500000.00 27787.5 166687.5 423 424 425 426 427 428 429 430 431 432 433 434 55537.5 0 1 0 -43762.50 0.898876 -39337.08 -2062.50 0.807979 -1666.46 -113212.50 0.726273 -82223.19 200000 -50000 [200000*(0.25)] -1490962.50 0.652830 -973344.64 -1096571.37 435 436 a 437 438 439 440 b 441 c 442 d 443 HIM Rea NET CASH FLOW FROM PURCHASING THE EQUIPMENT = -1096571 AS WE ARE COMPARING BETWEEN PURCHASE AND LEASING, APPROPRIATE DISCOUNT RATE WILL BE AFTER TAX COST OF DEBT WHICH IS 15%(1-0.25) = 11.25% PV OF LEASE COSTING = (-410000 X0.75) * [email protected]% FOR 4 YEARS = (-410000) X 0.75 X 3.085958= PV OF LEASE COSTING = -948932 SO NAL = 147639 leasing is advantageous convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean RI KE CAPM UTILITY, SHARPE, beta ferences YIELD bond portfolio WACC BO! 120% - 9 * * "O ENG O -_ 1 + DOER 25-11-2019)

ke - Microsoft Excel (Product Activation Failed) Add-Ins View - 2x Σ AutoSum : A Dr General s Wrap Text FMerce Merge & Center - Center X 2 E. = File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = E Copy Paste BIU - D A E E E Format Painter Clipboard Font DY462 DR DS 443 $ % % , 4.0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells DT DU DVDWDXDYDZ EA 444 NOTE 445 446 447 COST OF MACHINE DEPRE RATES 33.33% 44.45% 14.81% 7.41% 1500000 DEPRECIATION TAX SAVING = 25% X DEPRECIATION 499950 124987.5 666750 166687.5 222150 55537.5 111150 27787.5 NOTE INTEREST PER YEAR = 1500000 X 15% = 225000 448 449 450 451 452 453 454 455 456 457 458 459 460 461 462 463 HIM Rea convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean RI KE CAPM UTILITY, SHARPE, beta ferences YIELD bond portfolio WACC BO! 120% - 9 * * "O ENG O -_ + DOER 25-11-2019)