3. XYZ Builders need to acquire the use of a crane for construction business, and are considering buying or leasing a crane. The crane costs Rs. 1,000,000, and is subject to the straight-line method of depreciation to a zero-salvage value at the end of 5 years. In contrast, the lease rent is Rs 220,000 per year to be paid in advance each year for 5 years. XYZ Builders can raise debt at 14% payable in equal annual instalments, each instalment due at the beginning of the year. The company is in the 50% tax bracket. Should it lease or buy the crane?
3. XYZ Builders need to acquire the use of a crane for construction business, and are considering buying or leasing a crane. The crane costs Rs. 1,000,000, and is subject to the straight-line method of depreciation to a zero-salvage value at the end of 5 years. In contrast, the lease rent is Rs 220,000 per year to be paid in advance each year for 5 years. XYZ Builders can raise debt at 14% payable in equal annual instalments, each instalment due at the beginning of the year. The company is in the 50% tax bracket. Should it lease or buy the crane?
Related questions
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 |
