Sadik Industries must install $1 million of new machinery in its Texas plant, It can obtain a 6 -year bank foan for 100% of the cost at a 15% interest rate with equal payments at the end of each year. Sadik's tax rate is 25%. The equipment falls in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333,0.4445,0.1481, and 0.0741 .) Aiternatively, a Texas investment banking firm that represents a group of investors can arrange a guideline lease calting for payments of $320,000 at the end of each year for 3 years. Under the proposed lease terms, the Sadik must pay for insurance, property taxes, and maintenance. Sadik must use the equipment if it 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 Year 3 . The best estimate of this market value is $210,000, but it could be much higher or lower under certain circumstances. If purchased at Year 3 , the used equipment would fall into the MACRS 3year class. Sadik would actually be able to make the purchase on the last doy of the year (i.e., slightly before Year 3), so Sadik would get to take the first depreciation expense at Year 3 (the remaining depreciation expenses would be from Year 4 through Year 5 ). On the time line, Sadik would show the cost of purchasing the used equipment at Year 3 and its depreciation expenses starting at Year 3. To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions: a. What is the cost of owning? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest dollar. 5 b. What is the cost of leasing? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest doliar. 5 c. What is the net advantage of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar: $ Should Sadik take the lease? Explain. Since the cost of leasing the machinery is than the cost of owning it, the firm should the equipment. d. Consider the $210,000 estimated residual value. How high could the residual value get before the net advantage of leasing falls to zero? Do not round intermediate calculations. Round your answer to the nearest dollar. 5 Alternatively, a Texas investment banking firm that represents a group of investors can arrange a guideline lease calling each year for 3 years. Under the proposed lease terms, the Sadik must pay for insurance, property taxes, and maintena Sadik must use the equipment if it is to continue in business, so it will almost certainly want to acquire the property at he lease terms it can purchase the machinery at its fair market value at Year 3. The best estimate of this market value or lower under certain circumstances. If purchased at Year 3, the used equipment would fall into the MACRS 3-year clas he purchase on the last day of the year (i.e., slightly before Year 3), so Sadik would get to take the first depreciation e lepreciation expenses would be from Year 4 through Year 6 ). On the time line, Sadik would show the cost of purchasing depreciation expenses starting at Year 3. Io assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions a. What is the cost of owning? Enter your answer as a positive value. Do not round intermediate calculations. Rc b. What is the cost of leasing? Enter your answer as a positive value. Do not round intermediate calculations. c. What is the net advantage of leasing? Do not round intermediate calculations. Round your answer to the nea Should Sadik take the lease? Explain. Since the cost of leasing the machinery han the cost of owning it, the firm should d. Consider the $210,000 estimated residuo........... nigh could the residual value get before the net advan intermediate calculations. Round your answer to the nearest dollar. of new machinery in its Texas plant. It can obtain a 6 -year bank loan for 100% of the cost at a 15% interest rate r. Sadik's tax rate is 25%. The equipment falls in the MACRS 3 -year class. (The depreciation rates for Year 1 throu nd 0.0741.) ng firm that represents a group of investors can arrange a guideline lease calling for payments of $320,000 at the sed lease terms, the Sadik must pay for insurance, property taxes, and maintenance. continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, th chinery at its fair market value at Year 3 . The best estimate of this market value is $210,000, but it could be mucl f purchased at Year 3, the used equipment would fall into the MACRS 3-year class. Sadik would actually be able to (i.e., slightly before Year 3), so Sadik would get to take the first depreciation expense at Year 3 (the remaining ear 4 through Year 6 ). On the time line, Sadik would show the cost of purchasing the used equipment at Year 3 ar oper lease-versus-buy decision, you are asked to answer the following questions: nter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest ter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest c leasing? Do not round intermediate calculations. Round your answer to the nearest dollar. Explain. nachinery is than the cost of owning it, the firm shoul he equipment. ted residual value. How high could the residual value get before nd your answer to the nearest dollar. age of leasing falls to zero? Do no