Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Devyn Laboratories wants to acquire a $10,000,000 electronic microscope. Devyn can either buy and own the microscope or lease it fir 10 years. If owned,
Devyn Laboratories wants to acquire a $10,000,000 electronic microscope. Devyn can either buy and own the microscope or lease it fir 10 years. If owned, the microscope would be depreciated on a straight-line basis to a book salvage value of $0 over the next 10 years. The actual cash salvage value is expected to be $3,500,000 at the end of 10 years. To purchase, Devyn can borrow the needed funds at a pre-tax rate of 12%. If purchased the microscope, Devyn will incur annual maintenance expenses of $190,000. These expenses would not be incurred if the microscope is leased. The lease rate would be $1,250,000 per year, payable at the end of each year. Devyn's weighted after-tax cost of capital is 15% and marginal tax rate is 40%. Answer the following questions. To show your work supporting your answer, write down what you entered into your calculator. a) Determine the present value of after-tax operating cost of owning the microscope. [3 points) b) Determine the present value of the microscope's salvage value. [3 points c) Determine the present value of depreciation tax shield. [3 points d) Determine the present value of the after-tax annual lease payments. [3 points) e) Determine the net advantage of leasing the pump (NAL). [2 points) f) Do you recommend buying or leasing the microscope and why? [1 point] Devyn Laboratories wants to acquire a $10,000,000 electronic microscope. Devyn can either buy and own the microscope or lease it fir 10 years. If owned, the microscope would be depreciated on a straight-line basis to a book salvage value of $0 over the next 10 years. The actual cash salvage value is expected to be $3,500,000 at the end of 10 years. To purchase, Devyn can borrow the needed funds at a pre-tax rate of 12%. If purchased the microscope, Devyn will incur annual maintenance expenses of $190,000. These expenses would not be incurred if the microscope is leased. The lease rate would be $1,250,000 per year, payable at the end of each year. Devyn's weighted after-tax cost of capital is 15% and marginal tax rate is 40%. Answer the following questions. To show your work supporting your answer, write down what you entered into your calculator. a) Determine the present value of after-tax operating cost of owning the microscope. [3 points) b) Determine the present value of the microscope's salvage value. [3 points c) Determine the present value of depreciation tax shield. [3 points d) Determine the present value of the after-tax annual lease payments. [3 points) e) Determine the net advantage of leasing the pump (NAL). [2 points) f) Do you recommend buying or leasing the microscope and why? [1 point]
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