--%>
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 : Evaluating Beta of a Corporation

    Baldwin Corporation is planning to expand into the business of providing on-demand movies. Baldwin has debt-to-equity ratio of .25, its pretax cost of debt is 9%, and its marginal tax rate is 40%. The Harrington Corporation is already in the on-demand movie business,

    		•
  • Q : Explain the model of Heath Explain the

    Explain the model of Heath, Jarrow and Morton regarding tree building or Monte Carlo simulation.

    		•
  • Q : Case Study 2 You have joined Zurich

    You have joined Zurich Pvt. Ltd as a Finance manager. You are given the following information: Zurich Pvt Ltd. is a diversified manufacturing firm dealing with electrical appliances. In 2012, the firm reported an operating income of Rs. 857.60 million and faced a tax rate of 35% on income. The firm

    		•
  • Q : Why classical option pricing required

    Why classical option pricing with constant volatility required?

    		•
  • Q : Explain company creates value for its

    Is this true that a company creates value for its shareholders in a year when this distributes dividends or when the quotation of the shares increases?

    		•
  • Q : Describe nominal gross domestic product

    Nominal gross domestic product: If GDP of a particular year is estimated on the base of price of similar year, it is termed as nominal GDP.

    		•
  • Q : Problem on rules of the International

    RainFlower Trading Limited is a wholesaler of electronic calculators in Hong Kong. It has been importing goods from a Philippine manufacturer for eight years. The Philippine manufacturer had accepted payments in advance in the past. Recently, because of political turm

    		•
  • Q : Explain consensus among the chief

    Is there any consensus among the chief authors in finance concerning the market risk premium?

    		•
  • Q : Determining Profitable purchasing ABC

    ABC Corporation is interested in purchasing a machine which will cost $50,000, and it will depreciate it on the straight-line basis over a 5-year period. The machine is predicted to last for 7 years and then Milan will sell it for $5,000. The expected earnings before

    		•
  • Q : Porters Primary activities Porter’s

    Porter’s Primary activities: 1. Inbound Logistics: • Suppliers’ details.• Storage details with respect to materials.• Details regarding pl

    		•