To finance some manufacturing tools it needs for the next 3 years, Waldrop Corpo

Question

To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4.900,000, the purchase price, at 8% and buy the tools, or it can make 3 equal end- of-year lease payments of $2,050,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 30%. Annual maintenance costs associated with ownership are estimated at $220,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.) $96 O $106 O $118 O $130 O $138

Explanation / Answer

Answer:-

In Case Company is purchasing the machine Year Cash outflow Interest Depreciation Maintenance Cost Total Expense Tax saving @ 30% 1 441000 1633333.33 220000 2294333.33 688300 2 441000 1633333.33 220000 2294333.33 688300 3 441000 1633333.33 220000 2294333.33 688300 6882999.99 2064900 Depreciation per year 4900000/3 = 1633333.33 Interest Paid Per year @ 9% 4900000*9% = 441000 In Case Company Take Machine On Lease Year Lease Payment Tax saving @ 30% 1 2050000 615000 2 2050000 615000 3 2050000 615000 Total 6150000 1845000 The Net Advantage from Leasing is 219899.997 = 219$ (in 000's $) All the answer in the above question is incorrect The Correct answer is $219 If you have any problem in any point then ask in comment box

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