Wolfson Corporation has decided to purchase a new machine that costs $4.0 millio
ID: 2738749 • Letter: W
Question
Wolfson Corporation has decided to purchase a new machine that costs $4.0 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 30 percent. The Sur Bank has offered Wolfson a four-year loan for $4.0 million. The repayment schedule is four yearly principal repayments of $1,000,000 and an interest charge of 7 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1,150,000 per year are due at the beginning of each of the four years of the lease.
B. What is the maximum annual lease Wolfson would be willing to pay?
Wolfson Corporation has decided to purchase a new machine that costs $4.0 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 30 percent. The Sur Bank has offered Wolfson a four-year loan for $4.0 million. The repayment schedule is four yearly principal repayments of $1,000,000 and an interest charge of 7 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1,150,000 per year are due at the beginning of each of the four years of the lease.
Explanation / Answer
Step-1:
Calculation of NAL of leasing:
Wolfsan is ready to purchase machine cost = 4 million or $4,000,000 for four years
Tax rate = $4,000,000 * 30% = $1,200,000
The sur bank Offer loan for four years = 4 million
Each year repayment = $1,000,000
Interest rate per year = 7% on repayment
= $1,000,000 * 7% = $70,000
Interest amount for four years = $70,000 * 4 = $280,000
Total cost of machine = $4,280,000
Lease the same machine:
Lease payment = 1,150,000 per years * 4 years
= $4,600,000
The NAL leasing = $320,000
Step-2:
Lease payment per year = 1,150,000 per years * 4 years
Actual lease payment = $4,600,000 for four years
The lease payment should be below the machine cost or it better to purchase the new machine instead of taking lease machine. The Wolfsan willing pay the lease payment below the machine cost or equal to machine cost, because if he purchases a new machine, there is no use with the machine after four it is good to take lease machine, if lease payment is equal to machine cost.
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