National Co. is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: After-tax cash flow Lease -64,329 -64,329 -64,329 -64,329 64,329 End of year Purchase -68,454 -59,110 -63,596 -66,633 30,056 1 3 4
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- Guardian Inc. is trying to develop an asset-financing plan. The firm has $500,000 in temporary current assets and $400,000 in permanent current assets. Guardian also has $600,000 in fixed assets. Assume a tax rate of 30 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 80 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 6 percent on short-term financing. Compute the annual interest payments under each plan. Annual Interest Conservative Aggressive b. Given that Guardian's earnings before interest and taxes are $380,000, calculate earnings after taxes for each of your alternatives. Earning After Taxes Conservative AggressiveFive Star is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $149,600 of 5% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of equipment Life of equipment Estimated residual value of equipment Yearly costs to operate the warehouse, excluding depreciation of equipment Yearly expected revenues-years 1-8 Yearly expected revenues-years 9-16 Required: Differential revenue from alternatives: Revenue from operating warehouse Revenue from investment in bonds Differential revenue from operating warehouse 1. Prepare a differential analysis report of the proposed operation of the warehouse for the 16 years as compared with present conditions. Five Star Proposal to Operate Warehouse. Differential cost of alternatives: Costs to operate warehouse ✓ $149,600 16 years $27,500 Cost of equipment less residual…Guardian Inc. is trying to develop an asset-financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent. a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing. Compute the annual interest payments under each plan. b. Given that Guardian’s earnings before interest and taxes are $200,000, calculate earnings after taxes for each of your alternatives. c. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?
- Guardian Incorporated is trying to develop an asset-financing plan. The firm has $390,000 in temporary current assets and $290,000 in permanent current assets. Guardian also has $490,000 in fixed assets. Assume a tax rate of 40 percent. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 90 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 12 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan. Given that Guardian’s earnings before interest and taxes are $270,000, calculate earnings after taxes for each of your alternatives. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The returns of the least and of the purchase are as follows:Lease Annual end-of-year lease payments of $25,200 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at termination of the lease. Purchase The research equipment, costing $60,000, can be financed entirely with a 14% loan requiring annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-yar recovery period (33.33%, 44.45%, 14.81%, and 7.41%, respectively). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to…A company with a WACC of 14% is evaluating two projects for this year. The following is the estimated cash flow after deducting tax, including depreciation, as follows: (on the image below) a. Calculate the NPV, IRR, and payback, for each of these projects.b. If it were assumed that the two projects were independent, which project would you recommend?c. If the two projects were mutually exclusive, which project would you recommend?
- JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The returns of the least and of the purchase are as follows:Lease Annual end-of-year lease payments of $25,200 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at termination of the lease. Purchase The research equipment, costing $60,000, can be financed entirely with a 14% loan requiring annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-yar recovery period (33.33%, 44.45%, 14.81%, and 7.41%, respectively). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to…XYZ Inc. desires to evaluate two plans for acquiring equipment: borrowing to purchase and leasing. Thefirm is in the 40% tax bracket and it’s after tax cost of debt is 7.8%. The equipment costs $32,000 and willhave a 5-year life. It will be depreciated under MACRS using a 5-year recovery period. The total purchaseprice will be financed by a 5-year, 13% loan requiring equal annual end-of-year payments of $9,098. Thefirm will pay $2,350 per year for a service contract that covers all maintenance costs; insurance and othercosts will be borne by the firm. The firm plans to keep the equipment and use it beyond its 5-year recoveryperiod. Alternatively, the firm can lease the equipment under a 5-year lease requiring annual end-of yearpayments of $7,750. All maintenance costs will be paid by the lessor, and insurance and other costs will beborne by the lessee. The lessee will exercise its option to purchase the asset for $2,200 at termination of thelease. For the purchasing plan, calculate the…Postman Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of forklifts for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: Required: Compute the after-tax cash flows of each project. The tax rate is 40 percent and includes federal and state assessments.
- (1) Assume that the lease payments were actually 280,000 per year, that Consolidated Leasing is also in the 25% tax bracket, and that it also forecasts a 200,000 residual value. Also, to furnish the maintenance support, it would have to purchase a maintenance contract from the manufacturer at the same 20,000 annual cost, again paid in advance. Consolidated Leasing can obtain an expected 10% pre-tax return on investments of similar risk. What are its NPV and IRR of leasing under these conditions? (2) What do you think the lessors NPV would be if the lease payment were set at 260,000 per year? (Hint: The lessors cash flows would be a mirror image of the lessees cash flows.)NZ Ltd has decided to install a new item of plant, which will cost $500,000. The following alternative financing arrangements are available: Purchasing finance by borrowing Amount borrowed $500,000 Term of loan 5 years Interest rate 9.7% payable annually Lease plan Amount of finance $500,000 Term 5 years True interest rate 9.1% Annual instalments $128,880 Additional information The tax rate is 28%. Assume that tax benefits arising from deductible expenditures are received in the year of the expenditure. NZ Ltd uses the after-tax borrowing rate as a discount rate. Which financing option should NZ Ltd choose? Show your calculations of the cost of each financing option. Use whole numbers when rounding.Azimuth Company was considering the purchase of equipment. Details on the equipment are as follows: Year Original Investment Cash Flow 0 $200,000 1 $ 40,000 2 40,000 3 60,000 4 40,000 5 60,000 6 30,000 What is the payback period in years, assuming no taxes are paid? Group of answer choices 5.00 4.00 3.85 4.33