Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Craxton Engineering will either purchase or lease a new $ 756,000 fabricator. If purchased, the fabricator will be depreciated for tax purposes on a straight-line

Craxton Engineering will either purchase or lease a new $ 756,000 fabricator. If purchased, the fabricator will be depreciated for tax purposes on a straight-line basis over seven years. Craxton can lease the fabricator for $ 130,000 per year for seven years. Craxton's tax rate is 35%. (Assume the fabricator has no residual value at the end of the seven years. Also assume that the tax deductability benefit of the lease payments occurs at the time the lease payments are made.)

a. What are the free cash flow consequences of buying the fabricator?

FCF0 = Capital Expenditure = ?

.

FCF1-7 = Depreciation tax shield = ?

.

(Round your answers to the nearest dollar.)

b. What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease?

FCF0-6 = minus Lease payment + Income Tax Saving = ?

.

(Round your answers to the nearest dollar and include a negative sign where appropriate.)

c. What are the incremental free cash flows of leasing versus buying?

FCF0 = ?

.

FCF1-6 = ?

.

(Round your answers to the nearest dollar and include a negative sign where appropriate.)

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

International Financial Management

Authors: Cheol Eun, Bruce G. Resnick

8th edition

125971778X, 978-1259717789

More Books

Students also viewed these Finance questions