Question
Advanced Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the
Advanced Computers has decided to proceed with the manufacture and distribution of the virtual
keyboard (VK) the company has developed. To undertake this venture, the company needs to
obtain equipment for the production of the microphone for the key board. Because of the
required sensitivity of the microphone and its small size, the company needs specialized
equipment for production.
Lucas Johnson, the company president, has found a vendor for the equipment. Memtech
Acoustical Equipment has offered to sell Advanced Computers the necessary equipment at a
price of $4.3 million. Because of the rapid development of new technology, the equipment will
be fully depreciated after four years with the straight line depreciation approach. At the end of
the fourth year, the market value of the equipment is expected to be $450,000.
Alternatively, the company can lease the equipment. Two leasing companies, Hendrix Leasing
and International Leasing Corporation, offered their leasing terms to Advanced Computers.
Hendrix proposed the following lease contract: The lease contract calls for monthly payment of
$90,000 due at the beginning of each month for four years. Additionally, Advanced Computers
must make a security deposit $200,000 at the beginning of the lease contract (i.e. at the
beginning of the first month) and the deposit will be returned when the lease expires at the end of
the last month.
International Leasing Corporation proposed the following lease contract: The lease contract calls
for monthly payment of $91,500 due at the beginning of each month for four years without
security deposit.
Advanced Computers can borrow a loan with the interest rate of 10% per year from a bank to
finance the equipment. The company has a marginal tax rate of 21%.
Questions:
a. Calculate the net present values (NPVs) (it is also called net advantage to
leasing (NAL)) for Advanced Computers based on the lease contracts proposed by
Hendrix Leasing and International Leasing Corporation, respectively.
b. If the before-tax cost of debt of Hendrix Leasing is 4% per year and the marginal tax rate
is 21%, what is the net present value of the leasing contract for Hendrix Leasing?
c. If the before-tax cost of debt of International Leasing is 4.5% per year and the marginal
tax rate is 21%, what is the net present value of the leasing contract for International
Leasing?
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