As part of its overall plant modernization and cost reduction program, the management of Tanner Woods Textile Mills has decided to install a new automated weliving loom. In the capital budgeting analysis of this equipment, the IRR of the project was 10% versus a project required return of 129 The loom has an invoice price of $300,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at 10% interest rate with payments to be made at year end. In the event the loom purchased, the manufacturer will contract to maintain and service it for a fee of $19,000 per year paid at year end. The loom falls in the MACRS 5-year class, and Tanner Woods's marginal federal-plus-state tax rate is 35%. The applicable MACRS rates are 20%, 32%, 19%, 12% 11% and 6% United Automation Inc, maker of the loom has offered to lease the foom to Tanner Woods for $80,000 upon delivery and installation (att-0) plus 4 additional annual lease payments of $80,000 to be made at the end of Years 1 through 4 (Note that there are 5 lease payments in total.) The lease agreement includes maintenance servicing. Actually, the loont has an expected life of 10 years, at which time is expected salvage value is zero however, after 4 years, its market value is expected to equal its book value of $51,000. Tanner-Woods plans to build an entirely new plant in 4 years, so it has no interest in leasing or owning the proposed loom for more than that period a. Should the loom be leased or purchased? Do not round intermediate calculations, Round your answers to the nearest dollar. Negative value() should be indicated by a minus sign PV cost of owning at 6.50% is $ 70000 PV cost of leasing at 6.50% is 5 21000 Tanner-Woods Textile should purchase the loom. b. The salvage value is dearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pretax discount rate is 16% What would be the effect of a salvage value nisk adjustment on the decision? Do not round intermediate calculations. Round your answer to the nearest dollar Negative value should be indicated by a minus sign PV cost of owning is 5 The firm should loose v the loom. c. The original analysis assumed that Tanner Woods would not need the loom after 4 years. Now assume that the firm will continue to use the loom after the lease expires. Thus, if it leased, Tanner Woods would have to buy the asset after 4 years at the then existing market value, which is assumed to equal the book value. What effect would this requirement have on the basic analysis? (No numerical analysis is required; just verbalize:) The firm would choose to own As part of its overall plant modernization and cost reduction program, the management of Tanner Woods Textile Mills has decided to install a new automated weliving loom. In the capital budgeting analysis of this equipment, the IRR of the project was 10% versus a project required return of 129 The loom has an invoice price of $300,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at 10% interest rate with payments to be made at year end. In the event the loom purchased, the manufacturer will contract to maintain and service it for a fee of $19,000 per year paid at year end. The loom falls in the MACRS 5-year class, and Tanner Woods's marginal federal-plus-state tax rate is 35%. The applicable MACRS rates are 20%, 32%, 19%, 12% 11% and 6% United Automation Inc, maker of the loom has offered to lease the foom to Tanner Woods for $80,000 upon delivery and installation (att-0) plus 4 additional annual lease payments of $80,000 to be made at the end of Years 1 through 4 (Note that there are 5 lease payments in total.) The lease agreement includes maintenance servicing. Actually, the loont has an expected life of 10 years, at which time is expected salvage value is zero however, after 4 years, its market value is expected to equal its book value of $51,000. Tanner-Woods plans to build an entirely new plant in 4 years, so it has no interest in leasing or owning the proposed loom for more than that period a. Should the loom be leased or purchased? Do not round intermediate calculations, Round your answers to the nearest dollar. Negative value() should be indicated by a minus sign PV cost of owning at 6.50% is $ 70000 PV cost of leasing at 6.50% is 5 21000 Tanner-Woods Textile should purchase the loom. b. The salvage value is dearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pretax discount rate is 16% What would be the effect of a salvage value nisk adjustment on the decision? Do not round intermediate calculations. Round your answer to the nearest dollar Negative value should be indicated by a minus sign PV cost of owning is 5 The firm should loose v the loom. c. The original analysis assumed that Tanner Woods would not need the loom after 4 years. Now assume that the firm will continue to use the loom after the lease expires. Thus, if it leased, Tanner Woods would have to buy the asset after 4 years at the then existing market value, which is assumed to equal the book value. What effect would this requirement have on the basic analysis? (No numerical analysis is required; just verbalize:) The firm would choose to own
