--%>
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 : What is Stock Market Stock Market : To

    Stock Market: To trade company shares (or stock) and derivatives, a stock market or equity market is public entity where these shares and derivatives are sold at agreed price. These are to be listed on a stock exchange in order to trade publicly.

    		•
  • Q : EPS problem XY Corporation is an all

    XY Corporation is an all equity firm with a total value of $20 million. It needs an additional capital of $5 million, which may be either equity, or debt at the interest rate of 10%. After the new capitalization, the expected EBIT is $5 million, with standard deviatio

    		•
  • Q : Zero Coupon Bonds-Corporate Bonds

    Describe the term Zero Coupon Bonds in Corporate Bonds?

    		•
  • Q : How companies accuse investors make

    Sometimes, companies accuse investors of performing credit sales which they make their quotations fall. Is it true?

    		•
  • Q : Explain the Monte Carlo evaluation of

    Explain the Monte Carlo evaluation of integrals.

    		•
  • Q : Option Trading Strategies Explain the

    Explain the term Option Trading Strategies?

    		•
  • Q : Is this possible to make money in the

    Is this possible to make money in the stock market while the quotations are going down? And what is credit sale?

    		•
  • Q : What is the sales of the firm The

    The financial ratios of a firm are as follows. Current ratio = 1.33 Acid-test ratio = 0.80 Current liabilities = 40,000 Inventory turnover ratio = 6  What is the sales of the firm?

    		•
  • Q : Probability of dividend Universal

    Universal Corporation has the following dividend policy: if the earnings after taxes are less than $1 million, the dividend payout ratio will be 35%, but if these earnings are over $1 million, the dividend payout ratio will be 45%. The EBIT of Universal for next year

    		•
  • Q : What are capital investment The capital

    The capital investment appraisal techniques such as NPV, IRR, ARR, PV and Time value of money have become irrelevant post Celtic Tiger. Due to the depth of the recession companies do not have budgets to invest. Discus First use this information when you are writing this essay: 1.&

    		•