Question
Quantitative Problem 1:Findley Furniture Company must install$5.8million of new equipment in one of its plants. It can obtain a bank loan for 100% of the
Quantitative Problem 1:Findley Furniture Company must install$5.8million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply:
- The equipment falls in the MACRS 5-year class. The applicable MACRS rates are21%,30%,20%,13%,12%,and7%.
- The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for$120,000per year, payable at the end of the year.
- Findleys federal-plus-state tax rate is35%.
- If the money is borrowed, the bank loan will be at a rate of11%,amortized in 5 equal installments to be paid at the end of each year.
- The tentative lease terms call for end-of-year payments of$1.35million per year for 5 years.
- Attheendoftheleaseterm,theequipmentwillhaveanestimatedsalvagevalueof$850,000.Atthattime,Findleyplanstoreplacetheequipmentregardlessofwhetherthefirmleasesorpurchasesit.
What is the firms cost of owning the equipment? Round your answer to the nearest thousand dollars.
Quantitative Problem 2:Findley Furniture Company must install$5.7million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply:
- The equipment falls in the MACRS 5-year class. The applicable MACRS rates are22%,32%,21%,10%,9%,and5%.
- The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for$150,000per year, payable at the end of the year.
- Findleys federal-plus-state tax rate is40%.
- If the money is borrowed, the bank loan will be at a rate of10%,amortized in 5 equal installments to be paid at the end of each year.
- The tentative lease terms call for end-of-year payments of$1.30million per year for 5 years.
- Attheendoftheleaseterm,theequipmentwillhaveanestimatedsalvagevalueof$900,000.Atthattime,Findleyplanstoreplacetheequipmentregardlessofwhetherthefirmleasesorpurchasesit.
What is the firms cost of leasing the equipment? Round your answer to the nearest thousand dollars. $
Quantitative Problem 3:Findley Furniture Company must install$6.0million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply:
- The equipment falls in the MACRS 5-year class. The applicable MACRS rates are21%,30%,20%,10%,9%,and8%.
- The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for$120,000per year, payable at the end of the year.
- Findleys federal-plus-state tax rate is35%.
- If the money is borrowed, the bank loan will be at a rate of8%,amortized in 5 equal installments to be paid at the end of each year.
- The tentative lease terms call for end-of-year payments of$1.25million per year for 5 years.
- Attheendoftheleaseterm,theequipmentwillhaveanestimatedsalvagevalueof$950,000.Atthattime,Findleyplanstoreplacetheequipmentregardlessofwhetherthefirmleasesorpurchasesit.
What is the net advantage to leasing? Round your answer to the nearest thousand dollars.
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