Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Blow Finance Ltd (BFL) will acquire a fleet of 8 cars to use for five years. Each car costs $ 2.5 million. Blow Finance Ltd

Blow Finance Ltd (BFL) will acquire a fleet of 8 cars to use for five years. Each car costs $ 2.5 million. Blow Finance Ltd faces a 15% tax and has two alternatives regarding financing: Option I: Blow Finance Ltd can borrow the funds at 10 % (after tax) and buy the fleet. If it borrows, it will pay only interest each year and repay all the principal in five years. Blow Finance Ltd will depreciate the cars over five years, on a straight line basis. Option II: Blow Finance Ltd can lease the entire fleet for $ 15 million per year. Should Blow Finance Ltd buy or lease the fleet? Show all intermediate steps and workings. You must use the following figures which give the present value of $1 at 10%. Year 10% 1 0.9091 2 0.8264 3 0.7513 4 0.6830 5 0.6209

Hint:

1. Identify the after-tax cash flows;

2. Determine NPV of cash flows under each alternative;

3. Calculate the net advantage of leasing (NAL) and decide.

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

The Economics Of Money Banking And Financial Markets

Authors: Frederic S. Mishkin

12th Global Edition

1292268859, 978-1292268859

More Books

Students also viewed these Finance questions

Question

Define Administration?

Answered: 1 week ago

Question

4. Choose appropriate and powerful language

Answered: 1 week ago

Question

2. Choose an appropriate organizational pattern for your speech

Answered: 1 week ago