Question 5. Part a and b
6 out iking Furniture Company. You are evaluating a potential lease agreement on a new woodworking machine. be purchased on January 1 for $18,000 and can be depreciated over 3-year period using Straight Line Method with mid-year assumption. The mac 5-year actual life and the salvage value at the end of the 5th year is $500. The operating expenses of the machine will be $600 per year. Instead of purchasing, company can lease the asset for $5500 at the beginning of each year for 5 years. Operating costs will be paid by the lessor. (Assume the lease payments will occa the beginning of each year and the tax benefits associated with the lease payment occurs at the end of the year) The interest rate on the company's debt is 10%. weighted average cost of capital of the firm is 14%. The corporate tax rate is 25%. a)if you decide to buy the machine, what is the PV of depreciation tax saving ?[s] (sample answer: $3500.48), What is the PV of Salvage Value?[4] (sample answer: $3500.48) What is the total cost of Buying? [x] (sample answer: $35000.48) bylf you decide to lease, then what is the cost of Leasing? 11 (sample answer. $35000:48) c)What is Net Advantage to Leasing?[2] (sample answer: $35000.48 or $35000) d)is leasing better or buying is better?[a] (sample answer: Buying is better or Leasing is better) ion 5 out of 16 points There are two states of economy denoted as state A and B. Primary security Ais priced to be $0.45 and risk free interest rate is 12% a) What is the price of Primary security B?[X] (Sample answer: $0.55) b) If Tesla's stock is forecasted to be either $1500 if state A occurs and $500 it state Boccurs. What will be the price are you willing to pay for Testa's stock today? (Sample answer: $900) 16 out of 16 point estion 6 As a financial analyst at Credit Suisse Investment Bank, you are evaluating an option to purchase an equipment to expand the product line for the company There are two machines meeting the company's investment criteria, Machine Hand Machine L. Machine Hcosts more than Machine L but has the fexbility to be modified if the demand for the product is low while machine I cannot be modified. The following is the financial information about these two machines The project with Machine L is worth $50 million today and will be $60 million one year from today with high demand and $40 milion with low demand Machine can be // e 6 out iking Furniture Company. You are evaluating a potential lease agreement on a new woodworking machine. be purchased on January 1 for $18,000 and can be depreciated over 3-year period using Straight Line Method with mid-year assumption. The mac 5-year actual life and the salvage value at the end of the 5th year is $500. The operating expenses of the machine will be $600 per year. Instead of purchasing, company can lease the asset for $5500 at the beginning of each year for 5 years. Operating costs will be paid by the lessor. (Assume the lease payments will occa the beginning of each year and the tax benefits associated with the lease payment occurs at the end of the year) The interest rate on the company's debt is 10%. weighted average cost of capital of the firm is 14%. The corporate tax rate is 25%. a)if you decide to buy the machine, what is the PV of depreciation tax saving ?[s] (sample answer: $3500.48), What is the PV of Salvage Value?[4] (sample answer: $3500.48) What is the total cost of Buying? [x] (sample answer: $35000.48) bylf you decide to lease, then what is the cost of Leasing? 11 (sample answer. $35000:48) c)What is Net Advantage to Leasing?[2] (sample answer: $35000.48 or $35000) d)is leasing better or buying is better?[a] (sample answer: Buying is better or Leasing is better) ion 5 out of 16 points There are two states of economy denoted as state A and B. Primary security Ais priced to be $0.45 and risk free interest rate is 12% a) What is the price of Primary security B?[X] (Sample answer: $0.55) b) If Tesla's stock is forecasted to be either $1500 if state A occurs and $500 it state Boccurs. What will be the price are you willing to pay for Testa's stock today? (Sample answer: $900) 16 out of 16 point estion 6 As a financial analyst at Credit Suisse Investment Bank, you are evaluating an option to purchase an equipment to expand the product line for the company There are two machines meeting the company's investment criteria, Machine Hand Machine L. Machine Hcosts more than Machine L but has the fexbility to be modified if the demand for the product is low while machine I cannot be modified. The following is the financial information about these two machines The project with Machine L is worth $50 million today and will be $60 million one year from today with high demand and $40 milion with low demand Machine can be // e
