Week5 1. Your firm is considering leasing a radiographic x-ray machine. The lease lasts for three years. The lease calls for four payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over three years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0? answer 125,000 (show how answer was calculated) in microsoft word SOLUTION The after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0 will be $125,000. After-tax cash flow from purchasing in year 0 $140,000 Less: After-tax cash flow from leasing in year 0 $15,000 Net after-tax cash flow from leasing relative to purchasing in year 0 $125,000 Cash flow from purchasing in year 0 $140,000 Less: Tax (No tax as depreciation not taken in this year) $0 After-tax cash flow from purchasing in year 0 $140,000 Cash flow from leasing in year 0 $25,000 Less: Tax @ 40% $10,000 After-tax cash flow from leasing in year 0 $15,000 3. Your firm is considering leasing a new radiographic device. The lease lasts for three years. The lease calls for four payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over three years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. a. What is the NPV of the lease relative to the purchase? answer $115412 b. What would the after-tax cash flow in year three be if the asset had a residual value of $1,000 (ignoring any possible risk differences)? answer $ -4,0673. 44. Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the NPV of the lease relative to the purchase? A. -$125,000 B. $115,412 C. $75,000 D. $125,000 E. None of these 45. Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)? A. $600 B. $1,000 C. $4,067 140000/3= 46667 D. -$4,067 (25000*.40) ? [(46667*.40) + (1000-0)*(1-.60)] E. None of these 44. B 45. D1 Week 7 3. Firm Y expects a total cash need of $14,500 over the next 4 months. They have a beginning cash balance of $2,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm's current practice, what is the average daily cash balance (a month has 30 days)? example: 81. Limitless Styles has a 45 day accounts payable period. The firm has expected sales of $900, $1,200, $1,900, and $2,600, respectively, by quarter for the next calendar year. The cost of goods sold for a quarter is equal to 70 percent of the next quarter sales. The firm has a beginning payables balance of $600 as of quarter one. What is the amount of the projected cash disbursements for accounts payable for Quarter 3 of the next year? Assume that a year has 360 days. a. $950 b. $1,085 c. $1,195 d. $1,575 e. $1,820 Disbursement = [(45 / 90) (.70 $1,900)] + [(45 / 90) (.70 $2,600)] = $1,575

Week5 1. Your firm is considering leasing a radiographic x-ray machine. The lease lasts for three years. The lease calls for four payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over three years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0? answer 125,000 (show how answer was calculated) in microsoft word SOLUTION The after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0 will be $125,000. Less: Less: After-tax cash flow from purchasing in year 0 After-tax cash flow from leasing in year 0 Net after-tax cash flow from leasing relative to purchasing in year 0 Cash flow from purchasing in year 0 Tax (No tax as depreciation not taken in this year) After-tax cash flow from purchasing in year 0 Less: Cash flow from leasing in year 0 Tax @ 40% After-tax cash flow from leasing in year 0 $140,00 0 $15,000 $125,00 0 $140,00 0 $0 $140,00 0 $25,000 $10,000 $15,000 3. Your firm is considering leasing a new radiographic device. The lease lasts for three years. The lease calls for four payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over three years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. a. What is the NPV of the lease relative to the purchase? answer $115412 b. What would the after-tax cash flow in year three be if the asset had a residual value of $1,000 (ignoring any possible risk differences)? answer $ -4,0673. 44. Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the NPV of the lease relative to the purchase? A. -$125,000 B. $115,412 C. $75,000 D. $125,000 E. None of these 45. Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)? A. $600 B. $1,000 C. $4,067 140000/3= 46667 D. -$4,067 (25000*.40) - [(46667*.40) + (1000-0)*(1-.60)] E. None of these 44. B 45. D1 Week 7 3. Firm Y expects a total cash need of $14,500 over the next 4 months. They have a beginning cash balance of $2,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm's current practice, what is the average daily cash balance (a month has 30 days)? example: 81. Limitless Styles has a 45 day accounts payable period. The firm has expected sales of $900, $1,200, $1,900, and $2,600, respectively, by quarter for the next calendar year. The cost of goods sold for a quarter is equal to 70 percent of the next quarter sales. The firm has a beginning payables balance of $600 as of quarter one. What is the amount of the projected cash disbursements for accounts payable for Quarter 3 of the next year? Assume that a year has 360 days. a. $950 b. $1,085 c. $1,195 d. $1,575 e. $1,820 Disbursement = [(45 / 90) (.70 $1,900)] + [(45 / 90) (.70 $2,600)] = $1,575 1. First equation After tax cash flow from leasing relative vs after tax cash from purchase in years13 2. Second equation After tax cash flow from leasing relative to after tax cash flow from purchasing in year 0 3. Third equation 4. Fourth equation After tax cash flow in year 3 with asset residual value of $1000 ignoring any possible risks