Daiwan Semi-Conductors Company has a large backlog of customer orders among their automotive clients, in part due to chip shortages. Therefore, Daiwan needs to acquire a new machine used to lay silicon wafers onto computer processor chips in order to increase their production capacity.

There are 2 suppliers who could supply the new machinery: Howard Packard and Microsoft. Each company offers both financing and leasing alternatives for their respective offerings.

Using the case facts outlined below and the methods used in class, your task is to determine which of the options below you would recommend.

1. Lease from Daiwan
2. Purchase from Daiwan (using debt financing)
3. Lease from Microsoft
4. Purchase from Microsoft (using debt financing)
5. Otherone of the above?

 

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Daiwan Semi-Conductors Uses a discount rate of 15% for assessing all new investments Is subject to an income tax rate of 25.5% Howard Packard's equipment costs $125,000 and is expected to directly generate net new Gross Margins $50,000 per year. This transaction would not impact fixed costs. The Lease from Howard Packard i. Has a duration of 5 years ii. Has an annual lease payment of $30,000 (before tax) iii. Requires no Down Payment (no initial investment) The Financing Option from Howard Packard i. Requires no down payment, i.e. it is financed 100% through debt, at 8% annual interest, with annual principal and interest payments. The loan will be repaid in full in 5 years (5 total end-of-year payments). ii. The useful life of the asset is 5 years, i.e. after 5 years it has no remaining value. iii. CCA (depreciation for tax purposes) is an equal $25,000 for each of the 5 years of the #asset's useful life. Macrosoft's equipment costs $150,000 and is expected to directly generate net new Gross Margins of $65,000 per year A. The Lease from Macrosoft i. Has a duration of 5 years ii. Has an annual lease payment of $38,000 (before tax) iii. Requires no Down Payment (no initial investment) B. The Financing Option from Macrosoft i. Requires a $15,000 down-payment, i.e. it is financed 90% through debt, at 9% annual interest, with annual principal and interest payments. The loan will be repaid in full in 5 years (5 total end-of-year payments). ii. The useful life of the asset is 5 years, i.e. after 5 years it has no remaining value. iii. CCA (depreciation for tax purposes) is an equal $30,000 for each of the 5 years of the asset's useful life. Daiwan Semi-Conductors Uses a discount rate of 15% for assessing all new investments Is subject to an income tax rate of 25.5% Howard Packard's equipment costs $125,000 and is expected to directly generate net new Gross Margins $50,000 per year. This transaction would not impact fixed costs. The Lease from Howard Packard i. Has a duration of 5 years ii. Has an annual lease payment of $30,000 (before tax) iii. Requires no Down Payment (no initial investment) The Financing Option from Howard Packard i. Requires no down payment, i.e. it is financed 100% through debt, at 8% annual interest, with annual principal and interest payments. The loan will be repaid in full in 5 years (5 total end-of-year payments). ii. The useful life of the asset is 5 years, i.e. after 5 years it has no remaining value. iii. CCA (depreciation for tax purposes) is an equal $25,000 for each of the 5 years of the #asset's useful life. Macrosoft's equipment costs $150,000 and is expected to directly generate net new Gross Margins of $65,000 per year A. The Lease from Macrosoft i. Has a duration of 5 years ii. Has an annual lease payment of $38,000 (before tax) iii. Requires no Down Payment (no initial investment) B. The Financing Option from Macrosoft i. Requires a $15,000 down-payment, i.e. it is financed 90% through debt, at 9% annual interest, with annual principal and interest payments. The loan will be repaid in full in 5 years (5 total end-of-year payments). ii. The useful life of the asset is 5 years, i.e. after 5 years it has no remaining value. iii. CCA (depreciation for tax purposes) is an equal $30,000 for each of the 5 years of the asset's useful life.

Answer rating: 100% (QA)

purchasing from Microsoft using debt financing appears to be the most recommended option for Daiwan SemiConductors for the following reasons Analysis ... View the full answer