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.

Q3: (a) Compile the reducing balance depreciation schedule for the first 3 years

(b) If Aston borrows $500,000 from ABF Finance for 3 years, and repays the loan with 3 equal annual end-of-year payments of $200,000 each, calculate the final extra payment required at the end of the 3rd year to fully amortize the loan. Also, show the loan schedule.

Answer 1

Anstoer Given that caleculation af DePredaton sate Kate of Depre ciaton (Reschual vale atte tla expry af usefd life /oaginal Cast of aset) Vestimotel uefel tife Ca = 1 -(348673) Vo - 1-9 s10-10% Calculation of pressonatn Depreciatin' Wsi tan toon Vale Yeos DEPriCiaton 800.000 10%=&0,00 ,26 000 20100t16%-72,000 6,48,000 CA br48,000 10 A -64,800 5,e3,A00