I am stuck in this question. Please help!
Summary of Input Data Invoice Price $40,000 Length of loan Loan Interest rate 6% Maintenance expense per year $1,000 Tax Rate 25% Lease Payment per year $10,000 Expected value at the end of fourth year $10,000 MACRS Class 3 year Class Discount rate 4.50% We can now construct our table of incremental cash flows from these two alternatives. Remember, that the appropriate discount rate in this scenario is the after tax cost of borrowing, or: 6% *(1-25%) = 4.5%. MACRS 3-year Depreciation Schedule 2 Depr. Rate (Given) 33% 45% 15% ($13,200) 7% Depr. Exp. NPV LEASE ANALYSIS OF INCREMENTAL CASH FLOWS Year = 2 Cost of buy option Purchase cost ($40,000) Loan proceeds $40,000 loan interest payments Tax savings from interest payments Principal payment Lease payment Tax savings from lease payments Maintenance cost Tax savings from maintenance cost Tax savings from depreciation Salvage value Tax on gain or loss from the disposal of the loom Net cash flows $0 1) Sum of Present Values of All Net Cash Flows Year = Cost of leasing option 0 1 3 4 Purchase cost Loan proceeds loan interest payments Tax savings from interest payments Principal payment Lease payment Tax savings from lease payments Maintenance cost Tax savings from maintenance cost Tax savings from depreciation Salvage value Tax on gain or loss from the disposal of the loom Net cash flows 2) Sum of Present Values of All Net Cash Flows Cost Comparison Net Advantage to Leasing (NAL) [.e., 2)-1 Conclusion: Buy or Leasing??Lima Edit All Photos Adeel Irfan . LIVE Aria - 10 - A A Wrap Text Currency Insert - E . A ste B Delete - + - ZY H Merge & Center . $ -% ' 85 Conditional Format as Cell pboard Formatting - Table - Styles - Format . Sort & Find & Font Filter . Select . Alignment Number Styles Cells Editing 13 X v fx A B D G H K As part of its overall plant modernization and cost reduction program, Urban Warehouse & Distribution (Urban W&D)'s management has decided to install a new automated scanning equipment. Urban W&D is evaluating a potential lease for an automated scanning equipment with a 4-year life that costs $40,000 including delivery and installation charges and falls into the MACRS 3-year class. Buy Option: The funds needed could be borrowed from the bank at a 6% interest rate. If borrowed, Urban W&D would need to pay annaual interest for four years, with payment of the principal amount to be made at the end of the fourth year. In the event that the loom is purchased, Urban W&D will contract to maintain and service it for a fee of $1,000 per year paid at the end of each year. Urban W&D's marginal federal-plus-state tax rate is 25%. The scanning equipment will be used for 4 years, at the end of which time it will be fullyt depreciated but could be sold at an estimated value of $10,000. O Leasing option: Miami Automation Inc., maker of the scanning equipment, has offered to lease the equipment to Urban W&D for a $10,000 lease payment (4 payments total) at the end of each year for four years. The lease agreement includes maintenance and servicing. Should Urban W&Dlease or buy the loom? Please answer by filling all the cells in yellow in the templates given below. (Hint: Please study the examples related to Figure 18-1 and 18-2 and i NPV Lease Analysis.xisx located under "Supplemental Resources.") ... V. Urban Warehouse&Distribution + NTER Desktop 7:33 PM
