Question

Check my work 10 points Wolfson Corporation has decided to purchase a new machine that costs $3.8 million The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 22 percent. The Sur Bank has offered Wolfson a four-year loan for $3.8 million. The repayment schedule is four yearly principal repayments of $950,000 and an interest charge of 6 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson Lease payments of $1,080,000 per year are due at the beginning of each of the four years of the lease. eBook Print What is the NAL of leasing for Wolfson? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. What is the maximum annual lease Wolfson would be willing to pay? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) References a. NAL b. Annual lease payment Graw < Prev 5 of 6 Next > - Type hare to search Type here to search n e w $ @ 0 gos

Answer 1

NAL $ 76765 (6) Annual Lease payment $ loursus

a Net Advantages of Leasing (NAL) for Wolfson aliculans year o years year 2 year 2 Advantages of Lease: .cost of new machine $3800 000 Dis-advantages of Lease : Tan saving on - ($209000) 6 209000) 209.000) depreciation • Lease rent net of $(842400) & (842 400) $1842400) $1842400) tan Net cash flows $2957,600 $(1051400 ($1051400). ($1051400) [email protected]. 1.000 0.955 0.913 0.872 Present Value of $ 2957600 $1004087)|(89599282,69168202 cathflows Hence present value of NAIL ! = $2957600 - $ 1004087- $959928-$916820 = $ 76765 bence, N.AL of lease is $ 76,765.

Working note! W Calculation of Tan saving on depreciation Tan rate = 227. Amount method = of depreciation unden Straight line (Cost of assets - Salvage value life of assets 0 = $ 3800,000 - u yeans = $ 950.000 pen yean. Tan saving on depreciation : = $ asoooo x 22y. $209.000 (2) Calculation of Dis count hat. Discount rate = interest X (1-tanrate) rate 6.7 x 1- 227) = 6 X 0.78 (3) Calculation of Lease Rent net of tan : Lease rent net of tan = $1,080,000 - $1080 coox 22 ) : $ 1080 Coo-237600 = $ 842400

10 a Computation of Annual lease amount. Calculation of Present value of cash out flow under loan option: I Particulans Iyean. 1 year 2 year 3 yeana Total • Intenest net of Tan $177,840 $ 133,380 $ 88,920 $ 44460 1. Principal paid $ 950.000 $ 950,000 & a 50000 $ a 50.000 Tan saving on Depreciation (s. 209000) ($ 20900d ($ 209000) ($209000) 1. Net cash flows $918,840 $874380 $829,920 $785460 . Present value [email protected]% 0.955 0.913 0.872 0.832 ccaemme $877493 798308 723690 $653503 3052,993 Present value of cashout flow $8 + +992 +98308 $723,690 565 Page 2 of 2 Hence, present value of cash outflow under ban option is $3052993

working Note: (1) Calculation of interest amount : year Opening balance of loan $ 38 00 000 $ 98 50 000 $ 19 00 000 Inteneste6% $298.000 $ 17.000 $ 114000 $ 57.000 Principal paid $ 950,000 $ 950ooo $ 950,000 $9.50,000 Closing balance of loan $28 50.000 $19.00.000 $ 950.000 3 4 $a 50000

in calculation of amount of interest net of Tan veen Amount of interest | Intenest net of tan, $ 228,000 $ 177,840 (1928 000 *(1-227)] $ 171.000 $ 133 380 [171 0oox (1-2277 $ 114000 $88920 [siluooox (1-224) 7 $ 57000 $ 40460 857000 X (-227:)] son

Cashout flow computation of tease present value of under lease option : Led lease rent net of tan =n year Lease rent net of tan p.vif@ 4.684. Present value of cash I outflow 1.000 0.955 0.913 0.872 0.955n 0.9134 0.872n 3.74 x Total calculation of lease rent net of tan : present value of cash outflow Present value of unden lease option cash out flow unden loan option 3.fun - $ 3052993 = $ 3052 993 3.74 = $816,308. 288 = $816,308 (approximately ore $816,308 Hence Lease hent net of tan &

Calculation of Break Even Lease kent! Break-Ever Lease & $816308 (Tan natt = 224 7 (1-2244) Boom H OME $ 816, 308 0.78 - $ 10 u6548.7 $ 10 46,548 Hence Break Even to lease The Wolfson company lease of $ 1ou6548 $ 10u6548. should pay manimum annual ho
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