Hamlin Duplicating Company, Inc (HDC), is a leading copying company in Fort Myers, Florida. It was...

 

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Hamlin Duplicating Company, Inc (HDC), is a leading copying company in Fort Myers, Florida. It was founded 22 years ago by Skip and Marvin Hamlin. The brothers had both had difficulty in college duplicating class materials, so after they graduated, they had the idea to found a business based on duplicating materials for college courses. This service was particularly useful for professors who wished to use their own materials in classrooms or who required large quantities of duplicated materials. Colleges and universities encouraged their professors to use Hamlin's services since students paid the duplication expenses by purchasing materials directly from Hamlin. Hamlin also catered to local businesses by providing duplication of all kinds of promotional materials. However, the commercial side of the business represented only 27 percent of revenue and 38 percent of income before interest and taxes. Hamlin grew and by 2000 had franchises in 97 locations. In 2000, Skip Hamlin was considering the purchase of new duplicating machine that would triple the duplicating speed of the company. The new machine was also capable of duplicating in multicolors, collating, stapling, and binding. Skip estimated that it would increase the firm's revenue through higher job productivity. The first year's added revenue was estimated to be $75,000; thereafter, revenues would increase by the rate of inflation, 5 percent. Since the machine could be programmed by the operator and then left to complete the job, only one fully trained operator would be required to maintain the entire print facility. Thus, purchase of the machine would save $79,000 in salaries and benefits. The capital budgeting analysis indicated that the purchase of the machine had an internal rate of return of 16.2 percent over four years. Since the company used a 12.7 percent after-tax cost of capital for projects of such low risk, the project clearly was worth undertaking. The machine had an invoice price of $1,250,000, including delivery, installation, and training. The asset would be depreciated over four years using MACRS (thus, annual depreciation rates of 33, 45, 15, and 7 percent, respectively, were required). The net financing required for the system, if Hamlin borrows the money, would be the purchase price borrowed from South Florida National Bank on a four-year amortized note. The loan would carry an interest rate of 11.5 percent with annual principal and interest payments. If Hamlin purchases the equipment, the manufacturer will provide maintenance services for a fee of $75,000 per year. The machine is expected to have a useful life of six years at the rate at which Hamlin will use it, and Marvin Hamlin is concerned that the purchase will lock the company into using equipment that will be obsolete in four years or less. Lease Plan, Inc., a leasing company, has a plan that allows a client to lease the duplicator for four years. This lease requires and annual payment of $425,000, payable at the beginning of the year, and also provides for maintenance. In four years, Lease Plan should be able to sell the machine to a smaller company that does not require leading-edge equipment. The selling price at the time is estimated to be $65,000. Lease Plan views leasing as an alternative to lending the funds at 9 percent. Lease Plan has a marginal tax rate of 38 percent. Hamlin, however, is a much smaller company, so its marginal tax rate is only 20 percent. If you were Skip and Marvin Hamlin, would you purchase or lease the equipment? QUESTIONS 1. Calculate the net present value of leasing the equipment (also known as the net advantage of leasing) from the Hamlin brothers' point of view. Do you recommend that Hamlin purchase or lease the equipment? 2. What lease payment would make Hamlin indifferent between leasing and purchasing? (Hint: you need to set the NPV of leasing calculated in part 1 equal to zero by changing lease payments.) 3. Skip Hamlin recognizes that the analysis is influenced by the selection of the uncertain salvage value of the duplicator in year 4. The equipment could be worth the values below. What is the highest, lowest, and expected NPV of leasing using these data? What is the effect of salvage value on the NPV of the lease? How does this information affect your recommendation? Salvage Value $12,500 $65,000 $100,000 Suppose you learned that Hamlin's tax rate was about to increase substantially. What effect would this have on NPV of leasing? Probability 20 50 30 4. 5. Interest rates have been very volatile lately. Skip Hamlin thinks that rates could increase to 12.5 percent or decrease to 10.5 percent within the next few weeks. He also expects the lease payment to change if the interest rates change. The table below illustrates his expectations. Analyze the effects of potential interest rate changes. What is the highest and lowest NPV of leasing? (Maintain the tax rate and the salvage value at their most likely levels.) Interest Rate 10.5% 11.5% 12.5% Lease Payment $400,000 $425,000 $450,000 6. Evaluate the lease from Lease Plan's point of view. What is the NPV of the lease and internal rate of return? (Hint: Cash flows from lease to Lease Plan will be exactly the same as to Hamlin, but with opposite sign. Also Lease Plan has a higher tax rate and lower cost of debt.) 2 7. At what lease payment does Lease Plan earn exactly 9 percent? (Hint: as in part 2, you need to set the NPV of leasing equal to zero by changing lease payments.) What is the range of negotiation on the lease payment? 8. Hamlin Duplicating Company, Inc (HDC), is a leading copying company in Fort Myers, Florida. It was founded 22 years ago by Skip and Marvin Hamlin. The brothers had both had difficulty in college duplicating class materials, so after they graduated, they had the idea to found a business based on duplicating materials for college courses. This service was particularly useful for professors who wished to use their own materials in classrooms or who required large quantities of duplicated materials. Colleges and universities encouraged their professors to use Hamlin's services since students paid the duplication expenses by purchasing materials directly from Hamlin. Hamlin also catered to local businesses by providing duplication of all kinds of promotional materials. However, the commercial side of the business represented only 27 percent of revenue and 38 percent of income before interest and taxes. Hamlin grew and by 2000 had franchises in 97 locations. In 2000, Skip Hamlin was considering the purchase of new duplicating machine that would triple the duplicating speed of the company. The new machine was also capable of duplicating in multicolors, collating, stapling, and binding. Skip estimated that it would increase the firm's revenue through higher job productivity. The first year's added revenue was estimated to be $75,000; thereafter, revenues would increase by the rate of inflation, 5 percent. Since the machine could be programmed by the operator and then left to complete the job, only one fully trained operator would be required to maintain the entire print facility. Thus, purchase of the machine would save $79,000 in salaries and benefits. The capital budgeting analysis indicated that the purchase of the machine had an internal rate of return of 16.2 percent over four years. Since the company used a 12.7 percent after-tax cost of capital for projects of such low risk, the project clearly was worth undertaking. The machine had an invoice price of $1,250,000, including delivery, installation, and training. The asset would be depreciated over four years using MACRS (thus, annual depreciation rates of 33, 45, 15, and 7 percent, respectively, were required). The net financing required for the system, if Hamlin borrows the money, would be the purchase price borrowed from South Florida National Bank on a four-year amortized note. The loan would carry an interest rate of 11.5 percent with annual principal and interest payments. If Hamlin purchases the equipment, the manufacturer will provide maintenance services for a fee of $75,000 per year. The machine is expected to have a useful life of six years at the rate at which Hamlin will use it, and Marvin Hamlin is concerned that the purchase will lock the company into using equipment that will be obsolete in four years or less. Lease Plan, Inc., a leasing company, has a plan that allows a client to lease the duplicator for four years. This lease requires and annual payment of $425,000, payable at the beginning of the year, and also provides for maintenance. In four years, Lease Plan should be able to sell the machine to a smaller company that does not require leading-edge equipment. The selling price at the time is estimated to be $65,000. Lease Plan views leasing as an alternative to lending the funds at 9 percent. Lease Plan has a marginal tax rate of 38 percent. Hamlin, however, is a much smaller company, so its marginal tax rate is only 20 percent. If you were Skip and Marvin Hamlin, would you purchase or lease the equipment? QUESTIONS 1. Calculate the net present value of leasing the equipment (also known as the net advantage of leasing) from the Hamlin brothers' point of view. Do you recommend that Hamlin purchase or lease the equipment? 2. What lease payment would make Hamlin indifferent between leasing and purchasing? (Hint: you need to set the NPV of leasing calculated in part 1 equal to zero by changing lease payments.) 3. Skip Hamlin recognizes that the analysis is influenced by the selection of the uncertain salvage value of the duplicator in year 4. The equipment could be worth the values below. What is the highest, lowest, and expected NPV of leasing using these data? What is the effect of salvage value on the NPV of the lease? How does this information affect your recommendation? Salvage Value $12,500 $65,000 $100,000 Suppose you learned that Hamlin's tax rate was about to increase substantially. What effect would this have on NPV of leasing? Probability 20 50 30 4. 5. Interest rates have been very volatile lately. Skip Hamlin thinks that rates could increase to 12.5 percent or decrease to 10.5 percent within the next few weeks. He also expects the lease payment to change if the interest rates change. The table below illustrates his expectations. Analyze the effects of potential interest rate changes. What is the highest and lowest NPV of leasing? (Maintain the tax rate and the salvage value at their most likely levels.) Interest Rate 10.5% 11.5% 12.5% Lease Payment $400,000 $425,000 $450,000 6. Evaluate the lease from Lease Plan's point of view. What is the NPV of the lease and internal rate of return? (Hint: Cash flows from lease to Lease Plan will be exactly the same as to Hamlin, but with opposite sign. Also Lease Plan has a higher tax rate and lower cost of debt.) 2 7. At what lease payment does Lease Plan earn exactly 9 percent? (Hint: as in part 2, you need to set the NPV of leasing equal to zero by changing lease payments.) What is the range of negotiation on the lease payment? 8. Hamlin Duplicating Company, Inc (HDC), is a leading copying company in Fort Myers, Florida. It was founded 22 years ago by Skip and Marvin Hamlin. The brothers had both had difficulty in college duplicating class materials, so after they graduated, they had the idea to found a business based on duplicating materials for college courses. This service was particularly useful for professors who wished to use their own materials in classrooms or who required large quantities of duplicated materials. Colleges and universities encouraged their professors to use Hamlin's services since students paid the duplication expenses by purchasing materials directly from Hamlin. Hamlin also catered to local businesses by providing duplication of all kinds of promotional materials. However, the commercial side of the business represented only 27 percent of revenue and 38 percent of income before interest and taxes. Hamlin grew and by 2000 had franchises in 97 locations. In 2000, Skip Hamlin was considering the purchase of new duplicating machine that would triple the duplicating speed of the company. The new machine was also capable of duplicating in multicolors, collating, stapling, and binding. Skip estimated that it would increase the firm's revenue through higher job productivity. The first year's added revenue was estimated to be $75,000; thereafter, revenues would increase by the rate of inflation, 5 percent. Since the machine could be programmed by the operator and then left to complete the job, only one fully trained operator would be required to maintain the entire print facility. Thus, purchase of the machine would save $79,000 in salaries and benefits. The capital budgeting analysis indicated that the purchase of the machine had an internal rate of return of 16.2 percent over four years. Since the company used a 12.7 percent after-tax cost of capital for projects of such low risk, the project clearly was worth undertaking. The machine had an invoice price of $1,250,000, including delivery, installation, and training. The asset would be depreciated over four years using MACRS (thus, annual depreciation rates of 33, 45, 15, and 7 percent, respectively, were required). The net financing required for the system, if Hamlin borrows the money, would be the purchase price borrowed from South Florida National Bank on a four-year amortized note. The loan would carry an interest rate of 11.5 percent with annual principal and interest payments. If Hamlin purchases the equipment, the manufacturer will provide maintenance services for a fee of $75,000 per year. The machine is expected to have a useful life of six years at the rate at which Hamlin will use it, and Marvin Hamlin is concerned that the purchase will lock the company into using equipment that will be obsolete in four years or less. Lease Plan, Inc., a leasing company, has a plan that allows a client to lease the duplicator for four years. This lease requires and annual payment of $425,000, payable at the beginning of the year, and also provides for maintenance. In four years, Lease Plan should be able to sell the machine to a smaller company that does not require leading-edge equipment. The selling price at the time is estimated to be $65,000. Lease Plan views leasing as an alternative to lending the funds at 9 percent. Lease Plan has a marginal tax rate of 38 percent. Hamlin, however, is a much smaller company, so its marginal tax rate is only 20 percent. If you were Skip and Marvin Hamlin, would you purchase or lease the equipment? QUESTIONS 1. Calculate the net present value of leasing the equipment (also known as the net advantage of leasing) from the Hamlin brothers' point of view. Do you recommend that Hamlin purchase or lease the equipment? 2. What lease payment would make Hamlin indifferent between leasing and purchasing? (Hint: you need to set the NPV of leasing calculated in part 1 equal to zero by changing lease payments.) 3. Skip Hamlin recognizes that the analysis is influenced by the selection of the uncertain salvage value of the duplicator in year 4. The equipment could be worth the values below. What is the highest, lowest, and expected NPV of leasing using these data? What is the effect of salvage value on the NPV of the lease? How does this information affect your recommendation? Salvage Value $12,500 $65,000 $100,000 Suppose you learned that Hamlin's tax rate was about to increase substantially. What effect would this have on NPV of leasing? Probability 20 50 30 4. 5. Interest rates have been very volatile lately. Skip Hamlin thinks that rates could increase to 12.5 percent or decrease to 10.5 percent within the next few weeks. He also expects the lease payment to change if the interest rates change. The table below illustrates his expectations. Analyze the effects of potential interest rate changes. What is the highest and lowest NPV of leasing? (Maintain the tax rate and the salvage value at their most likely levels.) Interest Rate 10.5% 11.5% 12.5% Lease Payment $400,000 $425,000 $450,000 6. Evaluate the lease from Lease Plan's point of view. What is the NPV of the lease and internal rate of return? (Hint: Cash flows from lease to Lease Plan will be exactly the same as to Hamlin, but with opposite sign. Also Lease Plan has a higher tax rate and lower cost of debt.) 2 7. At what lease payment does Lease Plan earn exactly 9 percent? (Hint: as in part 2, you need to set the NPV of leasing equal to zero by changing lease payments.) What is the range of negotiation on the lease payment? 8. Hamlin Duplicating Company, Inc (HDC), is a leading copying company in Fort Myers, Florida. It was founded 22 years ago by Skip and Marvin Hamlin. The brothers had both had difficulty in college duplicating class materials, so after they graduated, they had the idea to found a business based on duplicating materials for college courses. This service was particularly useful for professors who wished to use their own materials in classrooms or who required large quantities of duplicated materials. Colleges and universities encouraged their professors to use Hamlin's services since students paid the duplication expenses by purchasing materials directly from Hamlin. Hamlin also catered to local businesses by providing duplication of all kinds of promotional materials. However, the commercial side of the business represented only 27 percent of revenue and 38 percent of income before interest and taxes. Hamlin grew and by 2000 had franchises in 97 locations. In 2000, Skip Hamlin was considering the purchase of new duplicating machine that would triple the duplicating speed of the company. The new machine was also capable of duplicating in multicolors, collating, stapling, and binding. Skip estimated that it would increase the firm's revenue through higher job productivity. The first year's added revenue was estimated to be $75,000; thereafter, revenues would increase by the rate of inflation, 5 percent. Since the machine could be programmed by the operator and then left to complete the job, only one fully trained operator would be required to maintain the entire print facility. Thus, purchase of the machine would save $79,000 in salaries and benefits. The capital budgeting analysis indicated that the purchase of the machine had an internal rate of return of 16.2 percent over four years. Since the company used a 12.7 percent after-tax cost of capital for projects of such low risk, the project clearly was worth undertaking. The machine had an invoice price of $1,250,000, including delivery, installation, and training. The asset would be depreciated over four years using MACRS (thus, annual depreciation rates of 33, 45, 15, and 7 percent, respectively, were required). The net financing required for the system, if Hamlin borrows the money, would be the purchase price borrowed from South Florida National Bank on a four-year amortized note. The loan would carry an interest rate of 11.5 percent with annual principal and interest payments. If Hamlin purchases the equipment, the manufacturer will provide maintenance services for a fee of $75,000 per year. The machine is expected to have a useful life of six years at the rate at which Hamlin will use it, and Marvin Hamlin is concerned that the purchase will lock the company into using equipment that will be obsolete in four years or less. Lease Plan, Inc., a leasing company, has a plan that allows a client to lease the duplicator for four years. This lease requires and annual payment of $425,000, payable at the beginning of the year, and also provides for maintenance. In four years, Lease Plan should be able to sell the machine to a smaller company that does not require leading-edge equipment. The selling price at the time is estimated to be $65,000. Lease Plan views leasing as an alternative to lending the funds at 9 percent. Lease Plan has a marginal tax rate of 38 percent. Hamlin, however, is a much smaller company, so its marginal tax rate is only 20 percent. If you were Skip and Marvin Hamlin, would you purchase or lease the equipment? QUESTIONS 1. Calculate the net present value of leasing the equipment (also known as the net advantage of leasing) from the Hamlin brothers' point of view. Do you recommend that Hamlin purchase or lease the equipment? 2. What lease payment would make Hamlin indifferent between leasing and purchasing? (Hint: you need to set the NPV of leasing calculated in part 1 equal to zero by changing lease payments.) 3. Skip Hamlin recognizes that the analysis is influenced by the selection of the uncertain salvage value of the duplicator in year 4. The equipment could be worth the values below. What is the highest, lowest, and expected NPV of leasing using these data? What is the effect of salvage value on the NPV of the lease? How does this information affect your recommendation? Salvage Value $12,500 $65,000 $100,000 Suppose you learned that Hamlin's tax rate was about to increase substantially. What effect would this have on NPV of leasing? Probability 20 50 30 4. 5. Interest rates have been very volatile lately. Skip Hamlin thinks that rates could increase to 12.5 percent or decrease to 10.5 percent within the next few weeks. He also expects the lease payment to change if the interest rates change. The table below illustrates his expectations. Analyze the effects of potential interest rate changes. What is the highest and lowest NPV of leasing? (Maintain the tax rate and the salvage value at their most likely levels.) Interest Rate 10.5% 11.5% 12.5% Lease Payment $400,000 $425,000 $450,000 6. Evaluate the lease from Lease Plan's point of view. What is the NPV of the lease and internal rate of return? (Hint: Cash flows from lease to Lease Plan will be exactly the same as to Hamlin, but with opposite sign. Also Lease Plan has a higher tax rate and lower cost of debt.) 2 7. At what lease payment does Lease Plan earn exactly 9 percent? (Hint: as in part 2, you need to set the NPV of leasing equal to zero by changing lease payments.) What is the range of negotiation on the lease payment? 8.

Answer rating: 100% (QA)

As Skip and Marvin Hamlin I would lease the equipment because the net present value of leasing is greater than the net present value of purchasing The net present value of leasing is calculated as fol... View the full answer