Finance Chapter 27 3 buying some new underwater photographic equipment

40.

Baxter Contractors is evaluating the lease versus the purchase of a

$329,000 machine. The machine will be depreciated using MACRS over a 4-

year period, after which the machine will be worthless. MACRS allows for

33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation

over years 1 to 4, respectively. The machine could be leased for $105,000 a

year for 4 years. The firm can borrow money at 9.5 percent and has a 35

percent tax rate. The firm does not expect to pay any taxes for the next 5

years. What is the net advantage to leasing?

41.

Frozen Foods Delivery is considering the purchase of a delivery truck

costing $49,000. The truck can be leased for 3 years at $19,500 per year or

it can be purchased at an interest rate of 7.5 percent. The estimated life of

the truck is 3 years. The corporate tax rate is 34 percent. The company does

not expect to owe any taxes for the next several years due to accumulated

net operating losses. The firm uses straight-line depreciation. What is the

net advantage to leasing?

42.

Cayman Productions is considering either leasing or buying some new

underwater photographic equipment. The lessor will charge $26,900 a year

for a 2-year lease. The purchase price is $48,600. The equipment has a 2–

year life after which time it will be worthless. Cayman uses straight-line

depreciation, borrows money at 8 percent, and has sufficient tax loss

carryovers to offset any taxes which otherwise might be owed for the next 4

years. What is the net advantage to leasing?

43.

Green Valley Farms is considering either leasing or buying some new farm

equipment. The lessor will charge $27,500 a year for a 5-year lease. The

purchase price is $136,000. The equipment has a 5-year life after which

time it will be worthless. Green Valley Farms uses straight-line

depreciation, has a 32 percent tax rate, borrows money at 10 percent, and

has sufficient tax loss carryovers to offset any potential taxable income the

firm might have over the next five years. What is the net advantage to

leasing?

44.

Cool Treats is considering either leasing or buying a new freezer unit. The

lessor will charge $11,900 a year for a 2-year lease. The purchase price is

$32,000. The freezer has a 2-year life after which time it is expected to have

a resale value of $9,000. Cool Treats uses straight-line depreciation,

borrows money at 8 percent, and has sufficient tax loss carryovers to offset

any potential taxable income the firm might have over the next 5 years.

What is the net advantage to leasing?

45.

Williams’ Paints is weighing a lease versus a purchase of some new

machinery. The purchase price is $312,000. The equipment will be

depreciated to zero over the 4-year life of the project after which time it is

expected to have a resale value of $76,000. The firm uses straight-line

depreciation and can borrow money at 8 percent. The equipment can be

leased for $66,000 a year for 4 years. Williams’ Paints does not expect to

owe any taxes for the next 4 years because of its net operating losses. What

is the net advantage to leasing?

46.

Bob’s Pizza is considering either leasing or buying a new oven. The lease

payments would be $10,200 a year for 3 years. The purchase price is

$29,000. The equipment has a 3-year life and then is expected to have a

resale value of $3,100. Bob’s Pizza uses straight-line depreciation, borrows

money at 10 percent, and has a 32 percent tax rate. What is the net

advantage to leasing?

47.

Charleston Marina is considering either leasing or buying some new

equipment it needs for repairing boats. The lease payments would be

$7,200 a year for 3 years. The purchase price is $20,800. The equipment has

a 3-year life and then is expected to have a resale value of $4,700. The firm

uses straight-line depreciation, borrows money at 8.5 percent, and has a 34

percent tax rate. What is the net advantage to leasing?

48.

Fargo North is considering the purchase of some new equipment costing

$118,000. This equipment has a 5-year life after which it will be worthless.

The firm uses straight-line depreciation and borrows funds at 9 percent

interest. The company’s tax rate is 33 percent. The firm also has the option

of leasing the equipment. What is the amount of the break-even lease

payment?

49.

A firm borrows money at 8.75 percent, uses straight-line depreciation, and

has a 37 percent tax rate. The firm’s break-even aftertax annual lease

payment on a machine is $16,511. How much will the firm have to pay

annually to the lessor to lease this machine?

50.

Fireplaces and More is considering the purchase of a delivery truck costing

$27,000. The truck will be used for 5 years and then it will be worthless. The

financing rate for the purchase is 7.5 percent and the corporate tax rate is

32 percent. The firm uses straight-line depreciation. What is the break-even

lease payment amount?

51.

Your firm is considering either leasing or buying some new equipment. The

lessor will charge $13,800 a year for 4 years should you decide to lease. The

purchase price is $47,800. The equipment has a 4-year life after which it is

expected to have a resale value of $8,400. Your firm uses straight-line

depreciation, borrows money at 10 percent, and has a 33 percent tax rate.

What is the aftertax salvage value of the equipment?

52.

J&K Enterprises is considering either leasing or buying some new

equipment. The lease payments would be $3,800 a year. The purchase price

is $19,900. The equipment has a 6-year life after which it is expected to

have a resale value of $2,100. Your firm uses straight-line depreciation,

borrows money at 11.5 percent, and has a 33 percent tax rate. What is the

aftertax salvage value of the equipment?

53.

Cross Town Express is contemplating the acquisition of some new

equipment. The purchase price is $74,000. The equipment would be

depreciated using MACRS depreciation which allows for 33.33 percent,

44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to

4, respectively. The equipment would be worthless after that time. The

equipment can be leased for $19,100 a year for 4 years. The firm can

borrow money at 9.5 percent and has a 28 percent tax rate. What is the

incremental annual cash flow for year 3 if the company decides to lease the

equipment rather than purchase it?

54.

Interstate Services needs some equipment costing $61,000. The equipment

has a 4-year life after which it will be worthless. The firm uses MACRS

depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent,

and 7.41 percent depreciation over years 1 to 4, respectively. The

equipment can be leased for $16,000 a year. The firm can borrow money at

7.5 percent and has a 36 percent tax rate. What is the incremental annual

cash flow for year 2 if the company decides to lease the equipment rather

than purchase it?

55.

Morrison Industrial Tool can either lease or buy some equipment. The lease

payments would be $12,400 a year. The purchase price is $34,900. The

equipment has a 3-year life after which it is expected to have a resale value

of $5,500. The firm uses straight-line depreciation over the asset’s life,

borrows money at 8 percent, and has a 34 percent tax rate. What is the

incremental cash flow for year 1 if the company decides to lease the

equipment rather than purchase it?

56.

A firm can either lease or buy some new equipment. The lease payments

would be $18,500 a year for 4 years. The purchase price is $72,900. The

equipment has a 4-year life after which it is expected to have a resale value

of $3,600. The firm uses straight-line depreciation over the life of the asset,

borrows money at 11 percent, and has a 35 percent tax rate. The company

does not expect to owe any taxes for at least 4 years because it has

accumulated net operating losses. What is the incremental cash flow for

year 3 if the company decides to lease rather than purchase the

equipment?

57.

Daily Enterprises is contemplating the acquisition of some new equipment.

The purchase price is $46,000. The company expects to sell the equipment

at the end of year 4 for $2,500. The firm uses MACRS depreciation which

allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent

depreciation over years 1 to 4, respectively. The equipment can be leased

for $12,300 a year for 4 years. The firm can borrow money at 7.5 percent

and has a 35 percent tax rate. What is the incremental annual cash flow for

year 4 if the company decides to lease the equipment rather than purchase

it?