High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available...

 

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High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $99,000 for five years, due at the beginning of each year. This machine will save Farmer $38,500 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $460,000. This machine will save $41,500 per year in electricity costs. A local bank has offered to finance the machine with a $460,000 loan. The interest rate on the loan will be 9 percent on the remaining balance and will require five annual principal payments of $92,000. Farmer has a target debt-to-asset ratio of 56 percent and a tax rate of 24 percent. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis. a. What is the NAL of leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much debt is displaced by this lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL a. b. PV High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $99,000 for five years, due at the beginning of each year. This machine will save Farmer $38,500 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $460,000. This machine will save $41,500 per year in electricity costs. A local bank has offered to finance the machine with a $460,000 loan. The interest rate on the loan will be 9 percent on the remaining balance and will require five annual principal payments of $92,000. Farmer has a target debt-to-asset ratio of 56 percent and a tax rate of 24 percent. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis. a. What is the NAL of leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much debt is displaced by this lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL a. b. PV

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SOLUTION To calculate the Net Advantage of Leasing NAL we need to compare the leasing option with the purchasing option Well calculate the Net Present Value NPV for each option and then subtract the N... View the full answer