Question

Please show the work. Please show and explain how you come to the numbers.

Your boss askes you to analyze a buy lease decision r equipment for your The new machinery will cost $2,200,000. You can get a loan for 1009 of the value of the loan and would pay interest only at a rate of 5.75% with a balloon payment at the end of the three Purchasing the equipment will require annual maintenance costs $250,000 a year (paid at the end of each year). The machine will depreciate under 3 yr MACRS. You expect to sell the machine for $325,000 at the end of three years. The firms tax rate is 40%. egarding some new firm. You are given the following information: years for the remaining balance. of Alternatively you could lease the machine for $1,000,000 a year, and all maintenance costs would be covered by the lessor. The equipment will be returned to the lessor the end of 3 years. (MACRS 1 Yr 33% 2 Yr 45% 3 Yr 15% 4 Yr 796)

Answer 1

SEE IMAGES

ANY DOUBTS, FEEL FREE TO ASK

C1 1 LEASING OPTION 2 LEASE MEANS TO TAKE ON RENT 3 TIME 4 LEASE PAYMENT AFTER TAX PV FACTOR@5 PV OF LEASE PAYMENTS 600000 600000 600000 0.9456 567375.89 0.8942536525.66 0.8456 507352.87 1611254.42 6 3 8 TOTAL PV OF LEASE PAYMENTS 10

12 LOAN 13 COST 14 RATE 15 YEARS 16 PMT 17 18 LOAN 19 20 21 2200000 5.75% 3 819237.47 (INSTALMENT) INSTALMENT INTEREST PRINCIPAL BALANCE 2200000 1507262.53 774692.65 819237.47 126500.00692737.47 1507262.53 86667.60732569.88 774692.65 0.00 819237.47 819237.47 44544.83774692.65

24 YEAR 25 MAINTENANCE 26 INTEREST 27 TOTAL EXPENSES 28 TAX PAID 29 TAX SAVING 30 FROM 31 DEPRECIATION 32 PRINCIPAL PAID 33 SALE OF MACHINE 34 TAX ON PROFIT 35 ON SALE OF MACHINE 36 NET CASH FLOW 37 PV FACTOR @5.75% 38 PV OF CASH FLOW 39 40 3 250000 44544.83 376500 336667.60-294544.83 150600 134667.04117817.932 250000 -126500 250000 86667.60 290400 396000 132000 692737.47-732569.88774692.65 171000 325000-154000) 68400 628237.4741 538570.44 716819.54 0.8456 0.9456 0.8942 594077.99-481594.77 -606134.09 -1681806.85

, projects (Autosaved) (Autosaved) (Autosaved) Microsoft Excel Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum ー E " ゴWrap Text aCopy в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 C Paste Conditional Format CeInsert Delete Format Formatting, as Table w styles. ▼ ㆆ ▼ Sort &Find & 2 ClearFe Select Edting Format Painter Clipboard Alignment Number Cells C56 40 41 42 43 44 TOTAL PV OF PURCHASE OF MACHINE = -1681806-85 45 TOTAL PV OF LEASE PAYMENTS= 46 47 AS OUT FLOW IS HIGHER IN CASE OF PURCHASE OF MACHINE, LEASING SHOULD BE DONE 48 49 50 51 52 53 54 1611254.42 56 57 external rate . MIRR NPV IRR , REPLACEMENT S HPR GMAM EAC MACRS | LEASE RATIOS CASH BUDGET wacc BOND EPS EBIT , REPLACEMENT , bond Sheet? 14096 | 08-05-2018

. projects (Autosaved) (Autosaved) (Autosaved) Microsoft Excel Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum Wrap Text ta copy." в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 C Conditional Format CeInsert Delete Format Formatting, as Table w styles. ▼ ㆆ ▼ Sort &Find & 2 ClearFe Select Edting Format Painter Clipboard Alignment Number Cells D61 50 51 52 53 YEAR 54 COST 2200000 DEPRECIATION 40% OF DEPRECIATION DEPRECIATION TAX SAVING ON DEPRECIATION 33% 45% 15% 7% 660000 990000 330000 154000 264000 56 57 58 59 SALE VALUE 325000 60 BOOK VALUE 154000 61 PROFIT 171000 62 63 64 65 132000 4 (Ctrl- 67 external rate . MIRR NPV IRR , REPLACEMENT S HPR GMAM EAC MACRS | LEASE RATIOS CASH BUDGET wacc BOND EPS EBIT , REPLACEMENT , bond Sheet? d press ENTER or choose Paste 140% ! 08-05-2018