orporation is considering the scorecard purchase of new manufacturing equipment

Question

orporation is considering the scorecard purchase of new manufacturing equipment that will cost s15,000 (ncuding shipping and installation). Scorecard can take out a four-year, $15,000 loan to pary for the equipment at an interest rate of 3.60%. The loan and purchase agreements will also contain the folowing protions: The annual maintenance expense for the equipment is expected to be $1s0. - - The equipment has a four-year depreciable life. The Modified Accelerated Cont Recovery system's (MACRS) depreciation rates for a three-yearanset ae 33.33%, 4445 14-81%, and 7.41%, respectively. The corporate tax rate for scorecard is 35%. Note: Scorecard Corporation is allawed to take a full-year depreciation tax-saving deduction in the first year Based on the preceding information, complete the following tables: Value Annual loan payment will be: Annual tax savings from maintenance will be: Year 1 Year 2 Year 3 Year 4 Tax savings from depreciation Net cash flo Thus, the net present value (NPy) cost of owning the asset will be: ? ??2.520 O -$21,927 410,347 O -39,847 Scorecard Corporation has been offered on operating lease on the same equipment. The four-year lease requires end-of-yeer payments of $600, and the firm wll have the option to buy the asset in four years for $3,300. The 5im will want to use the equipment longer than fouryears, so it plans to exercise this option. All meintenance will be provided by the lessor, what is the nev cost of leasing the assetz 0 -45,60I O -$13,883 0 ?1,117 Should Scorecard inose or buy the equipment

Explanation / Answer

a) Annual Loan Payment Loan $15,000.00 Rate 3.60% Period 4 Use PMT fumction in Excel = PMT(3.6%,4,15000 $4,093.47 b) Annual Tax from Maintenance = $150 x 35% $52.50 c) Year 1 2 3 4 Tax savings from depreciation = Cost of equipment x MACRS rate x Tax rate $1,749.83 $2,333.63 $777.52 $389.02 $15000 x 33.33% x 35% =$1749.83 $15000 x 44.45% x 35% =$2333.63 $15000 x 14.81% x 35% =$777.52 $15000 x 7.41% x 35% =$389.02 d) Net Cash Flow Loan Amortization Table Year Beginning Bal. Annual Payment Interest = Beginning Bal x 3.60% Principal Payment Ending Bal. 1 $15,000.00 $4,093.47 $540.00 $3,553.47 $11,446.53 2 $11,446.53 $4,093.47 $412.08 $3,681.39 $7,765.14 3 $7,765.14 $4,093.47 $279.55 $3,813.92 $3,951.22 4 $3,951.22 $4,093.47 $142.24 $3,951.22 $0.00 Year 0 1 2 3 4 Net Purchase Price -$15,000.00 Loan $15,000.00 Maintenance -$150.00 -$150.00 -$150.00 -$150.00 Tax saving on Maintenance $52.50 $52.50 $52.50 $52.50 Tax saving on Depreciation $1,749.83 $2,333.63 $777.52 $389.02 Principal Repayment -$3,553.47 -$3,681.39 -$3,813.92 -$3,951.22 Interest payment -$540.00 -$412.08 -$279.55 -$142.24 Interest Tax savings $189.00 $144.23 $97.84 $49.79 Net Cash Flow $0.00 -$2,252.14 -$1,713.11 -$3,315.60 -$3,752.16 PV @ 3.60% x (1-35%) = 2.34% 0.97714 0.95479 0.93296 0.91163 Present Value of owning the asset -$2,200.65 -$1,635.67 -$3,093.33 -$3,420.58 NPV -$10,350.22 Correct option is NPV = -$10,347 e) NPV of Leasing the assets Year 0 1 2 3 4 Annual Lease Payment -$600.00 -$600.00 -$600.00 -$600.00 Tax Savings from Lease Payment = $210.00 $210.00 $210.00 $210.00 Cost to exercise Option -$3,300.00 Net Cash Flow -$390.00 -$390.00 -$390.00 -$3,690.00 PV @ 3.60% x (1-35%) = 2.34% 0.9771 0.9548 0.9330 0.9116 Present value of leasing the asset -$381.08 -$372.37 -$363.86 -$3,363.91 NPV of Leasing the assets -$4,481.22 NAL = PV of Owning - PV of Leasing -$5,869.00 Lease Scoreboard should lease the Assets

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