The owner of an industrial juicing machine (initial value $1 million, economic l
ID: 2529179 • Letter: T
Question
The owner of an industrial juicing machine (initial value $1 million, economic life 10 years) considers leasing it under a 7-year leasing contact at $ 175,000 / year. The estimated value of the machine at the end of the lease is 40% of its initial value which will be taxable at 35%. Consider an 8% cost of debt capital and 12% cost of equity capital. The juicing machine was initially acquired using external financing and own equity in equal amounts. The owner uses straight line depreciation. Calculate the present-valued profitability of this lease for the lessor.
Explanation / Answer
So we have a Net loss of 1000000-741140.80 = 258859 , when we put juice machin on lease.
Disconted Cash Flow: Year Income(A) Depreciation(B) Finance Charges(8%) © D =A-B-C Tax(35%) (E) F=D-E Depreciation(G) H=F+G Cost of Equity(12%)(I) Present Value (G*I) 1 1,75,000.00 1,00,000.00 40,000.00 35,000.00 12250 22,750.00 1,00,000.00 1,22,750.00 0.892857143 1,09,598.21 2 1,75,000.00 1,00,000.00 40,000.00 35,000.00 12250 22,750.00 1,00,000.00 1,22,750.00 0.797193878 97,855.55 3 1,75,000.00 1,00,000.00 40,000.00 35,000.00 12250 22,750.00 1,00,000.00 1,22,750.00 0.711780248 87,371.03 4 1,75,000.00 1,00,000.00 40,000.00 35,000.00 12250 22,750.00 1,00,000.00 1,22,750.00 0.635518078 78,009.84 5 1,75,000.00 1,00,000.00 40,000.00 35,000.00 12250 22,750.00 1,00,000.00 1,22,750.00 0.567426856 69,651.65 6 1,75,000.00 1,00,000.00 40,000.00 35,000.00 12250 22,750.00 1,00,000.00 1,22,750.00 0.506631121 62,188.97 7 1,75,000.00 1,00,000.00 40,000.00 35,000.00 12250 22,750.00 1,00,000.00 1,22,750.00 0.452349215 55,525.87 7 Salvage 4,00,000.00 0.452349215 1,80,939.69 7,41,140.80 FINANCE CHARGES = (1000000*50%)*8% = 40000 DEPRECIATION = 1000000/10 = 100000Related Questions
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