Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Jeff & Bezos is a fresh groceries delivery company. The company has access to borrowing funds at a pre - tax rate of 8 %

Jeff & Bezos is a fresh groceries delivery company.The company has access to borrowing funds at a pre-tax rate of 8% per year. Jeff & Bezos pays income taxes using 25% tax rate.The company would like to start using high-speed low-altitude drones to deliver grocery purchases directly to residential customers' backyards. By doing so, the company would be saving$2.8 million pre-tax every single year.Jeff & Bezos is contemplating leasing the drones for a lease term that matches the drones' economic life. It would lease them from a different company, Nets & Flicks, that currently owns the required number of the drones. Doing that would have an estimated pre-tax annual cost of$2,170,000. Nets & Flicks' requirement isthat the lease payments are made by Jeff & Bezos at thebeginningof each year.Instead of leasing the fleet of the drones, Jeff & Bezos is also contemplating buying them, which would cost the company $9.5 million. If the company chooses to buy them, the drones would be losing their economic value following the straight-line depreciation method during theirfive-year life.The fleet of drones, due to their heavy usage, would have no salvage value at the end.
Jeff and bezos net advantage to leasing or NAL equals=
The maximum pre tax lease payment at which jeff bezos would be willing to sign the lease agreement with nets and flicks equals =
NAL=
Lease payment =

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

Urban Public Finance

Authors: D. Wildasin

1st Edition

0415851882, 978-0415851886

More Books

Students also viewed these Finance questions

Question

Understand annuities.

Answered: 1 week ago

Question

Design a health and safety policy.

Answered: 1 week ago