--%>
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 : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

    		•
  • Q : Discounting Free Cash Flow or

    Which of these two ways is better: discounting the Free Cash Flow or discounting the Equity Cash Flow?

    		•
  • 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 : Which currency is utilized in an

    Which currency has to be utilized in an international acquisition in order to compute the flows?

    		•
  • Q : State Transition Management Transition

    Transition Management: It is a financial service accessible to institutional investors who require making significant modifications to their portfolios, like merging, selling, or substantially restructuring them. This procedure can expose investors to

    		•
  • Q : Real estate problem Eric Rowan is

    Eric Rowan is planning to buy a house for $155,000 by borrowing money at the rate of 9%. He expects to rent the house for 5 years, collecting $20,000 annual rent in advance each year. He thinks that he can sell the house for $175,000 after five years. Fulton has incom

    		•
  • Q : Problem about commercial and fiscal

    A court assigned to me (as an auditor and economist) a valuation of a market butcher’s. The butcher’s did not give any simple income statements or any valuable information that I could use in my valuation. This is a small business with just two workers, th

    		•
  • 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 : Which capital structure must consider

    Which capital structure must we consider when estimating the WACC for a subsidiary valuation: the one which is reasonable according to the risk of the subsidiary’s business that the average of the company or the one the subsidiary as “tolerates/per

    		•
  • Q : What are flow variables Flow variables

    Flow variables: Any variable, whose magnitude is evaluated over a time period, is termed as glow variable.

    		•