Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Cash

A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Cash flows for owning versus leasing are estimated as follows. Assume that the cash flows from operations will remain level over a 10-year holding period. If purchased, the company will make an equity investment and finance the remainder with an interest-only loan that has a balloon payment due in year 10. The companys marginal income tax rate is 30% and the after-tax cash flow from sale of the property at the end of year 10 is expected to be $800,000. What would the initial equity investment have to be to generate a 15% incremental rate of return on equity with owning instead of leasing?

Own

Lease

Sales

800,000

800,000

Cost of goods sold

350,000

350,000

Gross income

450,000

450,000

Operating expenses:

Business

85,000

85,000

Real Estate

45,000

45,000

Lease payments

0

125,000

Interest

60,000

0

Depreciation

40,000

0

Taxable income

220,000

195,000

Tax

66,000

58,500

Income after tax

154,000

136,500

Plus: Depreciation

40,000

0

After-tax cash flow

194,000

136,500

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Managerial Finance

Authors: Lawrence J. Gitman, Chad J. Zutter

13th Edition

9780132738729, 136119468, 132738724, 978-0136119463

More Books

Students also viewed these Finance questions