Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a bank loan for 100% of the required amount. Alternatively, a Texas investment banking firm that represents a group of investors believes that it can arrange for a lease financing plan. Assume that these facts apply: 1. The equipment falls in the MACRS 3-year class. 2. Estimated maintenance expenses are $54,000 per year. 3. The firm's tax rate is 37%. 4. If the money is borrowed, the bank loan will be at a rate of 12%, amortized in six equal installments at the end of each year. 5. The tentative lease terms call for payments of $280,000 at the end of each year for 3 years. The lease is a guideline lease. 6. Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance. 7. Sadik must use the equipment if it is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms it can purchase the machinery at its fair market value at Year 3. The best estimate of this market value is $150,000, but it could be much higher or lower under certain circumstances. If purchased at Year 3, the used equipment would fall into the MACRS 3-year class. Sadik would actually be able to make the purchase on the last day of the year (i.e., slightly before Year 3), so Sadik would get to take the first depreciation expense at Year 3 (the remaining depreciation expenses would be at Year 4 through Year 6). On the time line, Sadik would show the cost of the used equipment at Year 3 and its depreciation expenses starting at Year 3. 3-year MACRS Year 1 33.33% 2 44.45% 3 14.81% 4 7.41% The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions: a. What is the net advantage of leasing? Should Sadik take the lease? Do not round intermediate calculations. Round your answer to the nearest dollar. Net advantage of leasing $ Since the cost of leasing the machinery is than the cost of owning it, the firm should the equipment. b. The decision almost can be considered a bet on the future residual value. Do you think the residual cash flows are equal in risk to the other cash flows? (Hint: if you discount a negative cash flow at a higher rate, you get a better NPV - the NPV of a negative cash flow stream is less negative at high discount rates.) Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a bank loan for 100% of the required amount. Alternatively, a Texas investment banking firm that represents a group of investors believes that it can arrange for a lease financing plan. Assume that these facts apply: 1. The equipment falls in the MACRS 3-year class. 2. Estimated maintenance expenses are $54,000 per year. 3. The firm's tax rate is 37%. 4. If the money is borrowed, the bank loan will be at a rate of 12%, amortized in six equal installments at the end of each year. 5. The tentative lease terms call for payments of $280,000 at the end of each year for 3 years. The lease is a guideline lease. 6. Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance. 7. Sadik must use the equipment if it is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms it can purchase the machinery at its fair market value at Year 3. The best estimate of this market value is $150,000, but it could be much higher or lower under certain circumstances. If purchased at Year 3, the used equipment would fall into the MACRS 3-year class. Sadik would actually be able to make the purchase on the last day of the year (i.e., slightly before Year 3), so Sadik would get to take the first depreciation expense at Year 3 (the remaining depreciation expenses would be at Year 4 through Year 6). On the time line, Sadik would show the cost of the used equipment at Year 3 and its depreciation expenses starting at Year 3. 3-year MACRS Year 1 33.33% 2 44.45% 3 14.81% 4 7.41% The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions: a. What is the net advantage of leasing? Should Sadik take the lease? Do not round intermediate calculations. Round your answer to the nearest dollar. Net advantage of leasing $ Since the cost of leasing the machinery is than the cost of owning it, the firm should the equipment. b. The decision almost can be considered a bet on the future residual value. Do you think the residual cash flows are equal in risk to the other cash flows? (Hint: if you discount a negative cash flow at a higher rate, you get a better NPV - the NPV of a negative cash flow stream is less negative at high discount rates.)
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
Tom Lamont, age 30, and Lin Lamont, age 31, have been married for six years. They got married right after Tom graduated from college. They have come to you for help in planning their financial...
-
The inductor in figure a is 4.7?H with a tolerance of 20%. Given the current waveform in figure b, graph the voltage v(t) for the minimum and maximum inductor values. v(t) L i(t) (a) 15 10 -5 -10 -15...
-
Which data type should an ampersand (\&) symbol be assigned?
-
Using the following data and assuming cost of goods sold is $273,700, prepare the cost of goods sold section of a merchandising income statement (periodic inventory system). Include the amount of...
-
Eastman Publishing Company is considering publishing a paperback textbook on spreadsheet applications for business. The fixed cost of manuscript preparation, textbook design, and production setup is...
-
\f
-
Which of yhe following is jot a barrier to effective teams
-
What are increases in resources that a firm earns by providing goods or services to its customers? a. Assets b. Revenues c. Expenses d. Liabilities
-
Discuss what is meant by the term tangible personal property.
-
If assets total \(\$ 140,000\) and liabilities total \(\$ 50,000\), how much are net assets? a. \(\$ 40,000\) b. \(\$ 90,000\) c. \(\$ 140,000\) d. \(\$ 50,000\)
-
What are the key criteria that must be satisfied for a retail sales tax to apply?
-
Which of the following items is not required to be included as part of a company's annual report? a. Notes to the financial statements b. Management discussion and analysis c. Detailed history of the...
-
1)A population of values has a normal distribution with mean=33.3 and standard deviation=32 , you intend to draw a random sample of size n=180. a)find the probability that a single randomly selected...
-
What are the four types of poultry production systems? Explain each type.
-
In September 2018, GolfWorld Magazine obtained \(\$ 12,000\) of subscriptions for one year of magazines and credited Unearned Sales Revenue. The magazines will begin to be delivered in October 2018....
-
Which of the following statements is incorrect regarding preparing financial statements? a. The adjusted trial balance lists only the statement of financial position accounts in a "debit" and...
-
Reinhardt Company reported revenues of \(\$ 122,000\) and expenses of \(\$ 83,000\) on its 2018 statement of earnings. In addition, Reinhardt declared \(\$ 4,000\) of dividends during 2018. On...
Study smarter with the SolutionInn App