Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%.
(Note: MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)
Question: What is the principal repayment in Year 2?
a. $33,233
b. $0
c. $6,979
d. $10,000
Question: What is the after-tax interest payment in Year 3?
a. $8,000
b. $2,924
c. $3,656
d. $6,000
Question: How much is the after-tax salvage value at the end of Year 3 if Carmichael Cleaners buys the machine?
a. $20,964
b. $24,000
c. $30,000
d. $25,482
Question: Should Carmichael Cleaners buy or lease the machine?
a. Buy, the net advantage to leasing is $5,734
b. Lease, the net advantage to leasing is $5,734
c. Buy, the net advantage to leasing is $4,822
d. Lease, the net advantage to leasing is $4,822
Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%.
(Note: MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)
Question: What is the principal repayment in Year 2?
| a. | $33,233 | |
| b. | $0 | |
| c. | $6,979 | |
| d. | $10,000 |
Question: What is the after-tax interest payment in Year 3?
| a. | $8,000 | |
| b. | $2,924 | |
| c. | $3,656 | |
| d. | $6,000 |
Question: How much is the after-tax salvage value at the end of Year 3 if Carmichael Cleaners buys the machine?
| a. | $20,964 | |
| b. | $24,000 | |
| c. | $30,000 | |
| d. | $25,482 |
Question: Should Carmichael Cleaners buy or lease the machine?
| a. | Buy, the net advantage to leasing is $5,734 | |
| b. | Lease, the net advantage to leasing is $5,734 | |
| c. | Buy, the net advantage to leasing is $4,822 | |
| d. | Lease, the net advantage to leasing is $4,822 |
Related questions
Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. (Note: MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741).
Question: How much is the principal repayment on the loan in Year 2?
| a. | $10,000 | |
| b. | $9,481 | |
| c. | $9,692 | |
| d. | $9,144 |
Question: How much is the after-tax interest payment on the loan in Year 3?
| a. | $2,190 | |
| b. | $3,138 | |
| c. | $1,883 | |
| d. | $1,314 |
Question: How much is the depreciation tax savings in Year 1?
| a. | $5,333 | |
| b. | $7,112 | |
| c. | $13,332 | |
| d. | $2,964 |
Question: How much is the Year 4 net cash costs if the truck is financed with debt?
| a. | $11,5743 | |||||||||||||
| b. | $6,286 | |||||||||||||
| c. | -$1,574 | |||||||||||||
| -$5,574 Question: What is the net advantage to leasing (NAL)?
|
