Chapter 19
Lease and Intermediate-Term Financing
9.
Net investment: $100,000
___________________________________________________________________________
(1) (2) (3) (4)
End of Lease Depreciation Actual Salvage Pretax Tax After-tax NCF PVIF Present
Year Income Value Income (40%) Income @20% Value
0 – – – – – – -1.000 –
1 $20,000 $14,290 – $5,710 $2,284 $3,426 $17,716
$14,757 2 20,000 24,490 – -4,490 -1,796
4,610
Because the present value of the net cash ows from the lease do not
exceed Darling’s required net investment, the project has a negative
net present value, and therefore is unacceptable.
10. a. $10,000,000 = PMT(PVIFA.10,12) = PMT(6.814)
b. $10,000,000 = PMT(PVIFA.10,9) = PMT(5.759)
c. $10,000,000 = PMT(PVIFA.06,8) = PMT(6.210)
19-
Chapter 19
Lease and Intermediate-Term Financing
11. $1,000,000 = PMT(PVIFA.09,5) = PMT(3.890)
Principal
Year Payment Interest(9%) Reduction Remaining Balance
0 – – – $1,000,000
1 $257,069 $90,000 $167,069 832,931
*Rounding error due to use of table to only 3 decimal places.
The effective cost of this loan is 9%, because interest is computed based
on the outstanding balance for each period times the 9% stated rate.
19-
Chapter 19
Lease and Intermediate-Term Financing
12.
Principal
Year Payment Interest(9%) Reduction Remaining Balance
0 – – – $1,000,000
1 $290,000 $90,000 $200,000 $800,000
The effective cost of this loan is 9%, because interest is computed based
on the outstanding balance for each period times the 9% stated rate.
13.
Principal
Year Payment Interest(9%) Reduction Remaining Balance
0 – – – $1,000,000
1 $90,000 $90,000
19-
Chapter 19
Lease and Intermediate-Term Financing
0 1,000,000
3 90,000 90,000
The effective cost of this loan is 9% because interest is computed based
on the outstanding balance for each period times the 9% stated rate.
14. a.
Principal
Year Payment Interest(10%) Reduction Remaining Balance
0 – – – $1,000,000
1 $125,000 $100,000 $25,000 975,000
2 125,000 97,500 27,500 947,500
b. This is a balloon loan. The payment in year 5 consists of $88,398 in
c. It differ from the loan in problem #11 in that the annual loan payments
19-
Chapter 19
Lease and Intermediate-Term Financing
d. The effective cost of this loan is 10%, because interest is computed
15.
Principal
Year Payment Interest(7%) Reduction Remaining Balance
0 – – – $10,000,000
1 $2,700,000 $700,000 $2,000,000 8,000,000
The effective interest cost of this loan is 7% because interest is
16. Interest for two years = 2(0.10)($200,000) = $40,000
19-
Chapter 19
Lease and Intermediate-Term Financing
Net proceeds = loan amount – prepaid interest
Computation of annual interest cost:
calculator)
17. a. $70,000 = PMT(PVIFA.10,4) = PMT(3.170)
b.
Principal
Year Payment Interest(10%) Reduction Remaining Balance
0 – – – $100,000
1 $25,082 $10,000 $15,082 84,918
* Di@erence is due to rounding in interest tables.
19-
Chapter 19
Lease and Intermediate-Term Financing
c. The effective rate is 10%.
(Note: Di@erence due to rounding in interest tables)
18. a. $1,000,000 = $284,333(PVIFAi,5)
b.
Principal
Year Payment Interest(13%) Reduction Remaining Balance
0 – – – $1,000,000
1 $284,333 $130,000 $154,333 845,667
2 284,333 109,937 174,396 671,270
19-
Chapter 19
Lease and Intermediate-Term Financing
*Di@erence from zero due to rounding in interest tables.
19. Net proceeds = $1,000,000 less $25,000 loan origination fee
20. Terminal value = $10,000,000 + $1,000,000(FVIFA.10,3)
21. No recommended solution.
19-
Chapter 19
Lease and Intermediate-Term Financing
SOLUTION TO INTEGRATIVE CASE PROBLEM:
LEASE AND TERM LOAN ANALYSIS
1.
__________________________________________________________
(1) (2) (3) (4) (5) (6)
End of Installed Asset Lease Payment Depreciation* Depreciation Additional Operating
Year Cost After-tax tax shield Costs if Owned
After-tax
0 $50,000 $6,600 – – –
1 – 6,600 $10,000 $ 4,000 –
*Depreciation is computed using the MACRS (post-1986) system . Total amount
(7)=(2)-(3)-(5)+(6) (8) (9)=(7)x(8) (10) (11) (12)=(10)x(11 ) (13)=(9)-(12)
NAL Cash Flows Except PVIF@6% Present After–Tax PVIF Present Value NAL
Salvage Value Salvage @ 12% Salvage
___________________________________________________________________________
$43,400 1.000 $43,400 – – – $43,400
-10,600 0.943 -9,996
– – -9,996 -13,000 0.890 -11,570 – –
– -812
Net Advantage to Leasing -$1,451
2. Because the NAL is negative, the ownership alternative is more attractive.
3. The present value cost of borrowing and buying is unchanged because
4. Straight-line depreciation would have an unfavorable impact on the
19-
Chapter 19
Lease and Intermediate-Term Financing
5. The after-tax salvage value would be:
The present value of this after-tax salvage benefit is:
Thus, the NAL would become $-2,972. The availability of a salvage
19-