Question

Additional Information for All Question: Return on market is 10%, return on T-bills is 4%, and companies pay 40% corporate tax and 30% capital gains tax.

Aston Inc. is a company that has a cost of capital of 16%. It is considering either leasing or purchasing a new machine for a project that still has 3 years of useful economic life left. Aston Inc. is currently using an old machine that is fully depreciated and amortized After accounting for revenue generated and other costs of operation, the NPV of using the old machine is about $8000 per year.

The new to annual pre-tax life income machine is more efficient and is expected of $150,000 a year for Aston.

As an incentive to firms to invest in environmentally friendly and efficient technology, governments offer subsidies of $20,000 (tax free) each year for 3 years, paid in advanced in the beginning of each year for companies purchasing the new machine Aston is considering. The new machine costs $800,000 and can be depreciated by the reducing balance method over 10 years to a residual book value of $278.942.75 Total operating and maintenance costs of the new machine is expected to be $70,000 (pre-tax) per year.

GXL Lease is a leasing company that is offering the new machine for lease; at $80,000 a year, paid in advance. GXL Lease requires a return of 15% a year ABF Finance is a finance company that is offering financing for the purchase of this machine, Leasing annual amortization payments at the end of each year. ABF Finance requires a return of 18% a year for financing this purchase.

Q4. (a) Is it feasible for Aston to lease the machine from GXL lease for 3 years and use it for the project?

(b) Is it feasible Aston to purchase the new machine for the project if it borrows $500,000 for 3 years from ABF Finance and amortizes the loan with equal end of year payments of $200,000 and a final payment at the end of 3 years (refer to Q3 (b) ); and sell the machine for $603,200 at the end of 3 years?

(c) Should Aston borrows $500,000 and purchase the new machine (refer to Q4 b) or continue using the old machine?

Answer 1

Given that n) calculolion of Depie Cialion Tale Rate ol Drpie cialion -I (Residual value aflcr ihe apiy of usesul lise loiginal cost of asse t)'cstimated usefal life (34 6-184)1D - lo1 of Oeprecia lion: calculalion coxillendoon value Dεp1ecialion Vear o00 .01K000 0 G18000 5,831200 G.48 000 lo