--%>
Assignment Help - homework help

Purchaing or leasing problem

Crawford Corporation is planning to lease a machine for the next 4 years for an annual lease payment of $3,000 paid in advance, plus a non-refundable initial fee of $3,000. There is a 1-year delay for the tax benefits of leasing. Crawford may buy the machine, depreciate it fully over the next 4 years, and then sell it for 10% of the purchase price. Crawford can borrow the money at 9% interest rate to finance the purchase, and its tax rate is 30%. Compute the price of the machine, which will make purchasing or leasing to be equally costly.

E

Expert

Verified

If the company has to be indifferent to leasing or buying, the net present value has to be set at zero. Let I be the price of machine. The after-tax cost of borrowing is 9% (1 – 0.3) = 6.3%.

Depreciation tax shield lost = (I/4)*0.3 = 0.075I
Payment shield = 3000*0.3 = $900
NPV = 0
I – 3000 – 3000 – (3000)(2.658)  + (900 - 0.075I)*3.44 – 0.07I*0.7832 = 0
I – 6000 – 5582.31 – 0.258I – 0.0548I = 0
0.687I = 10877.44
I = $15,831.66

   Related Questions in Corporate Finance

  • Q : Illustrates cost of its equity is zero

    Is this true that the cost of its equity is zero, if a company does not distribute dividends?

    		•
  • Q : Problem on implied exchange rate a) The

    a) The Australian firm sold a ship to a Swiss firm and gave the Swiss client an option of paying either AUS10,000 or SF15,000 in 9 months. (i) In above, the Australian firm efficiently gave the Swiss client a free option to buy up

    		•
  • Q : Operational efficiency and

    Distinguish between Operational efficiency and informational efficiency?

    		•
  • Q : Define Project Financing Project

    Project Financing: It is the procedure of determining how to go around obtaining the resources needed in managing the costs related with the launch and continuing operation of a project. Whereas this procedure sometimes comprises the re-allocation of

    		•
  • Q : Tax benefits of lease FedEx would like

    FedEx would like to acquire 300 vans for its business. It can buy each van for $35,000, depreciate it completely over 5 years, and then sell it for $10,000. The tax rate of FedEx is 30%, and its cost of debt is 10%. Avis Fleet Rental will lease these vans to FedEx for

    		•
  • Q : Calculate a positive net income for a

    Is this possible for a company with a positive net income and that does not distribute dividends to get itself in suspension of payments?

    		•
  • Q : Valuation & Merger analysis Problem

    Problem 21-1 Valuation Harrison Corporation is interested in acquiring Van Buren Corporation. Assume t

    		•
  • Q : Llustrate illiquidity risk and small

    My investment bank told me that beta given by Bloomberg incorporates the illiquidity risk and small cap premium since Bloomberg does well-known Bloomberg adjustment formula. Is it true?

    		•
  • Q : Abnormal profits based on fundamental

    If it is possible to make abnormal profits based on fundamental analysis, you can conclude that the market is: A) Not weak-form efficientB) Weak-form efficientC) Not semi-strong-form efficientD) Semi-strong-form e

    		•
  • Q : Public Finance which type of tax,

    which type of tax, direct or indirect is applicable in underdeveloped countries? Why? Show your critical areas and weaknesses.

    		•