NBT ltd is a sportswear manufacturer. The company recently plans to upgrade its production using automatic machines.
Question:
NBT ltd is a sportswear manufacturer. The company recently plans to upgrade its production using automatic machines. Because of the high costs of the machines, the company is considering a lease opportunity offered by a finance company called JET Finance who charges $1.29 million lease payment per year for 20 years. NBT finds this offer acceptable but wishes to negotiate for a better offer.
The following list shows the necessary information for conducting an analysis on this offer.
Cost of machine: $15,000,000
Useful life of the machine : 20 years
Depreciation method: straight-line for 20 years with 0 residual value.
Lease term : 20 years
cost of debt for NBT: 6%p.a.
tax rate for NBT: 20%
Tax rate for JET Finance : 35%
Requirement: Determine the minimum lease payment that can be accepted by JET Finance.