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FIN 516 WEEK 5 ? HOMEWORK PROBLEM 25-6 and 25-7

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Question;Problem;25-6 on Purchase versus Lease based on Chapter 25;Craxton Engineering will either purchase or lease a new;$756,000 fabricator. If purchased, the fabricator will be depreciated on a;straight-line basis over 7 years. Craxton can lease the fabricator for $130,000;per year for 7 years. Craxton?s tax rate is 35%. (Assume the fabricator has no;residual value at the end of the 7 years.);a. What are the free cash flow consequences of buying the;fabricator if the lease is a true tax lease?;b. What are the free cash flow consequences of leasing;the fabricator if the lease is a true tax lease?;c. What are the incremental free cash flows of leasing;versus buying?;Problem;25-7 on Purchase versus Lease based on Chapter 25;Riverton Mining plans to purchase or lease $220,000 worth;of excavation equipment. If purchased, the equipment will be depreciated on a;straight-line basis over 5 years, after which it will be worthless. If leased;the annual lease payments will be $55,000 per year for 5 years.;Assume Riverton?s borrowing cost is 8%, its tax rate is;35%, and the lease qualifies as a true tax lease.;a. If Riverton purchases the equipment, what is the;amount of the lease-equivalent loan?;b. Is Riverton better off leasing the equipment or;financing the purchase using the lease equivalent loan?;c. What is the effective after-tax lease borrowing rate?;How does this compare to Riverton?s actual after-tax borrowing rate?

 

Paper#49217 | Written in 18-Jul-2015

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