Question
Morris-Meyer mining company must install sh.1.5 million of new machinery in its Nevada plant. It can obtain a bank loan for 100 percent of the
Morris-Meyer mining company must install sh.1.5 million of new machinery in its Nevada plant. It can obtain a bank loan for 100 percent of the required amount. Alternatively, a Nevada investment banking firm that represents a group of investors believe that it can arrange for a lease financing plan. Assume that the following facts apply;
The equipment is depreciated on a straight line basis
Estimated maintenance expenses are sh.75,000 per annum
Morris-Meyers corporate tax rate is 30%
If the money is borrowed, the bank loan will be at a rate of 15%, amortized in four equal instalments to be paid at the end of each year.
The tentative lease terms call for end of year lease rental payments of sh;400,000 per year for 4 years
Under the proposed lease terms, the lease must pay for insurance, property taxes and maintenance cost
Morris-Meyer must use the equipment if if is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms, it can purchase the machinery at its fair market value at that time. The best estimate of this market value is the sh.250, 000 salvage value, but it could be much higher or lower under certain circumstances.
Required
A loan amortization schedule if money is borrowed to acquire the machinery
Should Morris-Meyer lease or borrow and buy the equipment? Explain
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