CDI hires you as a consulatant. They believe using software package can decrease costs by 1,000,000 per year. Perform anaylsis and fill in second table of whether should purchase or lease software, when the evaluation period is 5 years. Effective income tax rate is 45% and the MARR is 15% per year.
Overall problem data Annual revenue $1,000,000 Project life (years) 5 Effective tax rate 45% After-tax MARR 15% Purchase data Lease cost from RUKidding Initial cost $2,500,000 Annual lease cost $750,000 (paid at the end of each year) Annual Expenses ($220,000) Project Life (yrs) 5 GDS period 3 (cell range labelled "macrs") Market Value--5 $800,000 Tax rate 45% A.T. MARR 15%
NEED THIS chart filled in given the information above
Operating Investment Before tax Taxable Year Revenue Expenses and Market Cash Flow Depreciation Book Value Income Taxes ATCF 0 1 2 3 4 5 5 PW AW LEASE ANALYSIS Annual after-tax cash flow, including lease cost, revenue and annual expenses
CDI hires you as a consulatant. They believe using software package can decrease costs by 1,000,000 per year. Perform anaylsis and fill in second table of whether should purchase or lease software, when the evaluation period is 5 years. Effective income tax rate is 45% and the MARR is 15% per year.
| Overall problem data | ||||||
| Annual revenue | $1,000,000 | |||||
| Project life (years) | 5 | |||||
| Effective tax rate | 45% | |||||
| After-tax MARR | 15% | |||||
| Purchase data | Lease cost from RUKidding | |||||
| Initial cost | $2,500,000 | Annual lease cost | $750,000 | (paid at the end of each year) | ||
| Annual Expenses | ($220,000) | |||||
| Project Life (yrs) | 5 | |||||
| GDS period | 3 | (cell range labelled "macrs") | ||||
| Market Value--5 | $800,000 | |||||
| Tax rate | 45% | |||||
| A.T. MARR | 15% | |||||
NEED THIS chart filled in given the information above
| Operating | Investment | Before tax | Taxable | ||||||
| Year | Revenue | Expenses | and Market | Cash Flow | Depreciation | Book Value | Income | Taxes | ATCF |
| 0 | |||||||||
| 1 | |||||||||
| 2 | |||||||||
| 3 | |||||||||
| 4 | |||||||||
| 5 | |||||||||
| 5 | |||||||||
| PW | |||||||||
| AW | |||||||||
| LEASE ANALYSIS | |||||||||
| Annual after-tax cash flow, including lease cost, revenue and annual expenses | |||||||||
Related questions
The questions are based on the on the Lease versus Own and Sale/Leaseback Analysis values below Please show calculations. If the interest rate (or cost of capital or discount rate) for the firm making this decision is 10%, should the firm own the property, or should it lease the property? Why?
Sales Revenue $1,500,000
Cost of Goods Sold 50.00% of sales
Additional Overhead 200,000
Up-Front/Opening Costs 2,500,000
Lease Data:
Annual Payment 200,000
Lease Term 15 years
Operating Expenses 50.00% of payment
Tax Considerations:
Corporate tax rate 30.00%
Depreciable Life (in yrs) 32
*No value after 15 years.
Ownership Data:
⢠Property Value Today $2,000,000
⢠Time Since Purchase 5 years
⢠Purchase Price 1,800,000
⢠Building Value 1,575,000
⢠Land Value 225,000
⢠Resale Value year 15 3,000,000
⢠Loan-to-Value 76.06%
⢠Loan Amount 1,369,000
⢠Interest rate 10.00%
⢠Loan Term 10 years
⢠Equity Investment 431,000
CASH FLOW FROM SALE IF OWNED & SOLD AT END OF LEASE TERM:
Resale 3,000,000
Less: Mortgage Balance 1,369,000
Before-Tax Cash Flow 1,631,000
Resale 3,000,000
Less: Adjusted Basis 800,000
Capital Gain 2,200,000
Less: Tax 660,000
Additional cash flow from owning
After-Tax Cash Flow $971,000
CASH FLOW IF SOLD TODAY:
Resale 2,000,000
Less: Mortgage Balance 1,369,000
Before-Tax Cash Flow 631,000
Resale 2,000,000
Less: Adjusted Basis 1,550,000
Capital Gain 450,000
Less: Tax 135,000
After-Tax Cash Flow $496,000
SUMMARY OF AFTER-TAX CASH FLOW DIFFERENCES OF OWN vs. LEASE:
Outlay Cash Flow Reversion
Year 0 1 to 14 15
Initial Investment -496,000
Operations 59,170
Sale 971,000
Total ($496,000) $59,170 $971,000
This is the return from owing
IRR on ATCF differences 14.10%
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 |
| Own | 0 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 234,170 | 1,205,170 |
| Lease / Sale-Leaseback | 496,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 | 175,000 |
| Differnce of Own vs. Lease | -496,000 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 59,170 | 1,030,170 |
| IRR on Own vs. Lease | 14.10% |
IRR on Own vs. Lease 14.10%
