Delicious Food is expanding its business and wants to open a new facility to make frozen...

 

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Delicious Food is expanding its business and wants to open a new facility to make frozen lasagna, which requires a new automated lasagna maker. A lasagna maker can be purchased for $340,000 or leased under a finance lease over 7 years with lease payments to be made at the beginning of each year. If the company purchase the lasagna maker, it can be fully depreciated to zero using the straight-line method over ten years. The management expects the scrap/residual value of the lasagna maker to be $55,000 at the end of the lease. After a detailed analysis of the project, Delicious Food determines the appropriate after-tax cost of capital of the project to be 15% per annum. Delicious Food pays a corporate tax rate of 28% and it can borrow funds at a before-tax interest rate of 4.5% per annum. All cash-flows have been quoted on a before-tax basis. If Delicious Food has decided to acquire the lasagna maker, what is the maximum lease payment that would make it indifferent between leasing the asset and borrowing-to- buy the asset? (Using the approach discussed in the lecture; round to the nearest 2 digits) Delicious Food is expanding its business and wants to open a new facility to make frozen lasagna, which requires a new automated lasagna maker. A lasagna maker can be purchased for $340,000 or leased under a finance lease over 7 years with lease payments to be made at the beginning of each year. If the company purchase the lasagna maker, it can be fully depreciated to zero using the straight-line method over ten years. The management expects the scrap/residual value of the lasagna maker to be $55,000 at the end of the lease. After a detailed analysis of the project, Delicious Food determines the appropriate after-tax cost of capital of the project to be 15% per annum. Delicious Food pays a corporate tax rate of 28% and it can borrow funds at a before-tax interest rate of 4.5% per annum. All cash-flows have been quoted on a before-tax basis. If Delicious Food has decided to acquire the lasagna maker, what is the maximum lease payment that would make it indifferent between leasing the asset and borrowing-to- buy the asset? (Using the approach discussed in the lecture; round to the nearest 2 digits)

Answer rating: 100% (QA)

Comparing Purchase Option and Lease Option Purchase Option Cost 340000 Depreciation Straightli... View the full answer