Kohers Inc. is considering a leasing arrangement to finance some manufacturing t
ID: 2736328 • Letter: K
Question
Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm has the option to buy these tools. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at interest rate of 10% and buy the tools. The loan payments would be made at the end of each year. If it decides to lease or it can make three equal end-of-year lease payments of $2,100,000 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 35%. The Total Cash Outflows from the Cost of Purchase are the following: (Year 1) +208; (Year 2) +208; (Year 3) -4,592; all occurring at the end of respective years. Calculate the leasing cash outflows, and compare the present values. What is the net advantage to leasing (NAL), in thousands?
(Suggestion: Delete three zeros from dollars and work in thousands.)
Please Show Work
Explanation / Answer
Answer:
Net advantage to leasing:
NAL = PV cost of owning - PV cost of leasing
= $5541.67 - $3,615.17 = $1926.5
Year 0 1 2 3 1. Cost of owing: a) Net purchase Price -4800 b) Maintenance cost 208 208 -4592 c) Maintenance tax savings (line b*0.35) -72.8 -72.8 1607.2 d) Depreciation 1600 1600 1600 e) Dep tax savings (line d*0.35) 560 560 560 f) Net cash Flow -4800 695.2 695.2 -2424.8 g) PV cost of owing (@6.5%) ($5,541.67) 2.Cost of Leasing: a) Lease payments -2100 -2100 -2100 b) Lease pmt tax savings 735 735 735 c) Net cash flow -1365 -1365 -1365 d) PV of cost of leasing ($3,615.17)Related Questions
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