Cairns Ltd must choose between leasing or buying an indispensable machine. The machine costs $12 million...

 

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Cairns Ltd must choose between leasing or buying an indispensable machine. The machine costs $12 million and will be depreciated straight-line to zero over five years. Cairns Ltd's tax rate is 25 percent, and the firm can borrow at 8 percent. Atherton Leasing Company has offered to lease the machine to Cairns Ltd for payments of $2,500,000 at the start of each year. (Assume that tax is paid at the same time as expenditures are made.) But Atherton Leasing Ltd also requires a security deposit of $500,000 to be paid at the start of the lease, refundable at the end. Atherton Leasing Ltd's tax rate is 40% and it can borrow at 6 percent. Required: (a) What is the Net Advantage to Leasing for Cairns Ltd? (7 marks) (b) What is the minimum yearly pretax lease payment the Atherton Leasing Company would accept? (c) (7 marks) Will the lease contract be signed on the basis of your findings in parts (a) and (b)? Provide a brief reason for your decision. Cairns Ltd must choose between leasing or buying an indispensable machine. The machine costs $12 million and will be depreciated straight-line to zero over five years. Cairns Ltd's tax rate is 25 percent, and the firm can borrow at 8 percent. Atherton Leasing Company has offered to lease the machine to Cairns Ltd for payments of $2,500,000 at the start of each year. (Assume that tax is paid at the same time as expenditures are made.) But Atherton Leasing Ltd also requires a security deposit of $500,000 to be paid at the start of the lease, refundable at the end. Atherton Leasing Ltd's tax rate is 40% and it can borrow at 6 percent. Required: (a) What is the Net Advantage to Leasing for Cairns Ltd? (7 marks) (b) What is the minimum yearly pretax lease payment the Atherton Leasing Company would accept? (c) (7 marks) Will the lease contract be signed on the basis of your findings in parts (a) and (b)? Provide a brief reason for your decision.

Answer rating: 100% (QA)

a To calculate the Net Advantage to Leasing for Cairns Ltd we need to compare the cash flows associated with leasing and buying options and consider t... View the full answer