XYZ is contemplating either the outright purchase today or a lease of a major piece of machinery and wants you to recommend which would be preferable lease or buy The following are the terms associated with each option Purchase Price Option $1,000,000 Incremental Borrowing Rate 5 Estimated Life of Asset 15 Years Lease Payments $90,000 year for 15 Years with a $1 Purchase Option at the end of the lease How does the analysis in Question 1 change if the purchase option is $100,000 at the end of the lease instead of $1 How does the analysis in Question 1 change if the incremental borrowing rate is 10 XYZ is considering purchasing Struggle Industries XYZ has a required internal ROI for considering target acquisitions of 15 over ten years for new additions The following are some of the critical financial information of XYZ Determine what purchase price XYZ would be willing to consider for Struggle Industries given the following future estimated financial information for Struggle In Question 3 above, determine what the purchase price would change if XYZ could reduce its overhead expenses by $100,000 per year due to acquiring Struggle In Question 3 above, determine how the results might change if Struggle was a foreign company and any generated earnings that XYZ would look to repatriate were subject to a 10 tax XYZ has a facility that requires HVAC expenses of $100,000 year It can put in solar panels at $500,000, reducing this cost by $40,000 year The solar panels should last for 25 years before they will need to be replaced XYZs incremental borrowing rate is 5 Is this something you would recommend In Question 7, assume XYZ has an alternative use of the funding that would grow its operations It would invest much in marketing costs that it believes would result in increased revenues of $50,000 year in three years (i e , Years 4 through 25 would see the benefit) after the initial investment Is this a better use of the funds provided in Question 7 XYZ has an operation that currently generates $250,000 in profits It believes it can build a new factory for $1,000,000 to create earnings in the following stream over ten years Years 1 3 $0 Years 2 6 $150,000 year Years 7 10 $200,000 year It can borrow the money it needs for this investment at 5 Is this something it should do How would your answer change if an equity infusion will fund the money for this factory and the new stockholders require an ROI for any new investments of 7

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Aug 31, 2024

XYZ is contemplating either the outright purchase today or a lease of a major piece of machinery and wants you to recommend which would be

XYZ is contemplating either the outright purchase today or a lease of a major piece of machinery and wants you to recommend which would be preferable lease or buy. The following are the terms associated with each option:
- Purchase Price Option = $1,000,000
- Incremental Borrowing Rate = 5%
- Estimated Life of Asset = 15 Years
- Lease Payments = $90,000/year for 15 Years with a $1 Purchase Option at the end of the lease.
How does the analysis in Question 1 change if the purchase option is $100,000 at the end of the lease instead of $1?
How does the analysis in Question 1 change if the incremental borrowing rate is 10%?
XYZ is considering purchasing Struggle Industries. XYZ has a required internal ROI for considering target acquisitions of 15% over ten years for new additions. The following are some of the critical financial information of XYZ. Determine what purchase price XYZ would be willing to consider for Struggle Industries given the following future estimated financial information for Struggle.
In Question 3 above, determine what the purchase price would change if XYZ could reduce its overhead expenses by $100,000 per year due to acquiring Struggle.
In Question 3 above, determine how the results might change if Struggle was a foreign company and any generated earnings that XYZ would look to repatriate were subject to a 10% tax.
XYZ has a facility that requires HVAC expenses of $100,000/year. It can put in solar panels at $500,000, reducing this cost by $40,000/year. The solar panels should last for 25 years before they will need to be replaced. XYZs incremental borrowing rate is 5%. Is this something you would recommend?
In Question 7, assume XYZ has an alternative use of the funding that would grow its operations. It would invest much in marketing costs that it believes would result in increased revenues of $50,000/year in three years (i.e., Years 4 through 25 would see the benefit) after the initial investment. Is this a better use of the funds provided in Question 7?
XYZ has an operation that currently generates $250,000 in profits. It believes it can build a new factory for $1,000,000 to create earnings in the following stream over ten years.
- Years 1-3 = $0
- Years 2-6 = $150,000/year
- Years 7-10 = $200,000/year
  - It can borrow the money it needs for this investment at 5%. Is this something it should do?
How would your answer change if an equity infusion will fund the money for this factory and the new stockholders require an ROI for any new investments of 7%?