Question

Investment decision-Lessor's evaluation 2. Wilayah Leasing & Credit Berhad is arranging for a 6-year lease financing facility for a new boiler costing $5,000,000. Assume the following information:- . Equipment falls under the MACRS 5-year class An estimated annual maintenance expense of $150,000 is paid at the end of each year and this cost is expected to increase at a rate of 5% annually from year 4 onwards. Annual insurance premium is calculated at a rate of 1.65% of the insured value. For the first year, the equipment will be insured for $5.0 million. For the subsequent years, the book value of the asset is taken as the yearly insured value. Annual insurance premium are being paid at the beginning of the year. Under the proposed lease terms, the lessor must pay for maintenance and insurance The tentative lease payment calls for a six beginning-of-the-year payments of $650,000 Corporate tax is at 35% Wilayah Leasing will invest 75% of its fund to purchase the equipment and finance the remaining cost with a bank loan of 6.75% nominal rate, on yearly rests, payable in 6 years (ordinary annuity) • At the end of the lease period, the equipment can be sold for $500,000. Should Wilayah Leasing proceed with this arrangement to finance its customer?

can you answer it with the full explanation please...?
thanks in advance

Answer 1

	0	1	2	3	4	5	6
MACRS	-	20%	32%	19.20%	11.52%	11.52%	5.76%
Boiler Cost	5000000	4000000	2720000	2197760	1944578	1720563	1621458
Depriciation	-	1000000	1280000	522240	253182	224015.4	99104.41
Annual Maintance Cost		150000	150000	150000	150000	157500	165375
Insurance	82500	66000	44880	36263.04	32085.54	28389.28	26754.06
Lease Payment	650000	650000	650000	650000	650000	650000	650000
75% Cost of funding	3750000	0	0	0	0	0	0
25% Funding Cost	260224	260224.2	260224.2	260224.2	260224.2	260224.2	260224.2
Salvage Value	0	0	0	0	0	0	500000
Total Cost	4742724	126224.2	-174896	574247.2	839127.8	872098.1	503248.8
Tax	1659953	44178.46	-61213.5	200986.5	293694.7	305234.3	176137.1
Net Cost of funding	3082771	82046	-113682	373261	545433	566864	327112

Since the total cost is less than the cost of the asset the one should proceed with this arrangement