--%>
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 the Gordon and Shapiro

    What is the importance and the utility of the given formula: Ke = DIV(1+g)/P + g?

    		•
  • Q : Explain the result of volatility

    Explain the result of volatility structure.

    		•
  • Q : What is the required rate of return on

    Woidtke Manufacturing's stock currently sells for $29 a share. The stock just paid a dividend of $2.50 a share (i.e., D0 = $2.50), and the dividend is expected to grow forever at a constant rate of 9% a year. What st

    		•
  • Q : Define stock variable Stock variable :

    Stock variable: It is a variable whose value is measured or evaluated at a point of time.

    		•
  • Q : How economic doctrine relies on

    I read in a sentence passed through the Supreme Court that, so as to value companies, economic doctrine relies upon intermediary methods among ‘Anglo-Saxon’ theoretical models and the practical models common in the United

    		•
  • Q : Define the term Commercial Paper

    Commercial Paper: It is an unsecured obligation issued by the corporation or bank to finance its short-term credit requirements, like accounts inventory and receivable. Maturities usually range from 2 to 270 days. The commercial paper is accessible in

    		•
  • Q : NPV and Other Investment Criteria The

    The XYZ Manufacturing Company is considering the below investment proposal. The initial investment is $100,000. It was an expected economic life of 10 years. The net cash flow in the initial year is expected to be $25,000 and annual net cash flow is expected to develo

    		•
  • Q : Define reasonable things that a company

    There are four methods a company can utilize the money this generates: a) Buying other assets or companies; b) Reducing debt of it; c) Distribute this to shareholders, and d) Increasing cash holdings of it.

  • 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.

    		•
  • Q : Finc . A&B Enterprises is trying to

    . A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow: Year A B C D 1 $10,000 $50,000 $25,000 $ 0 2 20,000 40,000 25,000 0 3 30,000 30,000 25,000 45,0

    		•