Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Two firms, Cruella Inc. and Morticia Corporation, are considering the installation of an automated sun-blocking system in their respective headquarters. The system costs $10,000,000, and
Two firms, Cruella Inc. and Morticia Corporation, are considering the installation of an automated sun-blocking system in their respective headquarters. The system costs $10,000,000, and both firms would depreciate on a straight-line basis to a zero salvage value over an expected 5-year life. The expected salvage value on the system is $500,000 at the end of year 5. It is the policy of each firm to discount salvage values at their respected WACCs. If the firms purchase the system, the annual maintenance expenses are expected to be $125,000. Alternatively, the system can be leased for $2,650,000 due at the beginning of each year, and the lessor would be responsible for maintenance costs. Although the two firms have similar sun-blocking needs, their financial conditions differ significantly. Cruella has had difficulties recently, and therefore has a 0% effective tax rate, an annual cost of borrowing of 16%, and a WACC of 19.5%. Morticia is highly profitable, and therefore has a marginal tax rate of 40%, an annual cost of borrowing of 12%, and a WACC of 15%. Compute the NAL for each firm. Cruella $143,493; Morticia $(59,383) Cruella $143,493; Morticia $(56,427) Cruella $138,930; Morticia $(57,384) Cruella $138,930; Morticia $(58,472)
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