Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Delicious Food is expanding its business and wants to open a new facility to make frozen lasagna, which requires a new automated lasagna maker. A
Delicious Food is expanding its business and wants to open a new facility to make frozen lasagna, which requires a new automated lasagna maker. A lasagna maker can be purchased for $330,000 or leased under a finance lease over 7 years with lease payments to be made at the beginning of each year. If the company purchase the lasagna maker, it can be fully depreciated to zero using the straight-line method over nine years. The management expects the scrap/residual value of the lasagna maker to be $58,000 at the end of the lease. After a detailed analysis of the project, Delicious Food determines the appropriate after-tax cost of capital of the project to be 14% per annum. Delicious Food pays a corporate tax rate of 35% and it can borrow funds at a before-tax interest rate of 4% per annum. All cash-flows have been quoted on a before-tax basis. If Delicious Food has decided to acquire the lasagna maker, what is the maximum lease payment that would make it indifferent between leasing the asset and borrowing-to-buy the asset? (Using the approach discussed in the lecture; round to the nearest 2 digits) $46,435.31$61,274.21$50,994.36 None of the other answers is correct. $48,393.99
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started