Answered step by step
Verified Expert Solution
Question
1 Approved Answer
High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model
High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $98,000 for five years, due at the beginning of each year. This machine will save Farmer $38,000 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $455,000. This machine will save $41,000 per year in electricity costs. A local bank has offered to finance the machine with a $455,000 loan. The interest rate on the loan will be 9 percent on the remaining balance and will require five annual principal payments of $91,000. Farmer has a target debt-to-asset ratio of 56 percent and a tax rate of 23 percent. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis. a. What is the NAL of leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much debt is displaced by this lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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