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For problems #1, #2, and #3, I do not understand how each of these answers was arrived at in the answer chart for each problem. For problem #4, I am using the information from the categories in the previous problems but am unable to calculate the values for each category. Can you provide a full explanation of how each figure for each category was arrived at? 1) Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply: 1. The machinery falls into the MACRS 3-year class.2. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.3. The firm's tax rate is 40%.?4. The loan would have an interest rate of 15%.5. The lease terms call for $400,000 payments at the end of each of the next 4 years.?6. Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4th year.?What is the NAL (Net Advantage of Leasing) of the lease?You would have cash flows for owning and leasing in years 1-4.? You should also have?tax on residual value?in year 4 in cost of owning.NPV LEASE ANALYSISYear = 0 1 2 3 4?? Cost of OwningAfter-tax loan payments($135,000)($135,000)($135,000)($1,635,000)Maintenance CostTax savings from main.Tax savings from depr.$198,000$270,000$90,000$42,000Residual value$250,000Tax on residual value????($100,000)Net cash flow$0$63,000$135,000($45,000)($1,443,000)PV ownership cost @ 9%?$ (885,580.87)???Cost of LeasingLease payment(AT)?($240,000)($240,000)($240,000)($240,000)Net cash flow$0($240,000)($240,000)($240,000)($240,000)PV of leasing @ 6.5%?$ (777,532.77)???Cost ComparisonPV ownership cost @ 9%?$ (885,580.87)PV of leasing @9%?$ (777,532.77)Net Advantage to Leasing?$?? 108,048.102) Net advantage to leasing problem (NAL).ABC Industries is negotiating a lease on a new piece of equipment which would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for three years and then sold, because ABC plans to move to a new facility at that time. It is estimated that the equipment could be sold for $30,000 after three years of use. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each of the three years of usage. Conversely, ABC could lease the equipment for three years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would also include maintenance. ABC is in the 20 percent tax bracket, and it could obtain a three-year simple interest loan to purchase the equipment at a before tax cost of 10 percent. Should ABC lease or buy?NPV LEASE ANALYSISYear = 0 1 2 3?? Cost of OwningAfter-tax loan payments($8,000)($8,000)($108,000)Maintenance Cost (after tax)($2,400)($2,400)($2,400)$0Depreciation$33,000$45,000$15,000Tax savings from depr.$6,600$9,000$3,000Residual value$30,000Tax on residual value??? ($4,600)Net cash flow($2,400)($3,800)($1,400)($79,600)PV ownership cost @ 8%?$ (70,307.84) ???Cost of LeasingLease payment$29,000$29,000$29,000$0Tax savings from lease($5,800)($5,800)($5,800)$0Net cash flow$23,200$23,200$23,200$0PV of leasing @ 8%?$? 64,571.74???Cost ComparisonPV ownership cost @ 8%?$ (70,307.84)PV of leasing @ 8%?$? 64,571.74Net Advantage to Leasing?$?? (5,736.10)3) Walton Publishing Company (WPC) is evaluating a potential lease agreement on a printing press that costs $250,000 and falls into the MACRS 3-year class. The firm can borrow at an 8 percent rate on a 4-year amortized loan, if WPC decides to borrow and buy rather than lease. The press has a 4-year economic life, and its estimated residual value is $25,000 at the end of year 4. If WPC buys the press, it would purchase a maintenance contract that costs $5,000 per year, payable at the beginning of each year. The lease terms which include maintenance call for a $71,000 lease payment at the beginning of each year. WPC's tax rate is 40 percent. Should the firm lease or buy?Answer: They should buy because the PV is about 2,400 less. (Not sure if this is conclusion is correct or the chart analysis below is correct)YEAR01234BuyLoan-250,000.00depreciation-82,500.00-112,500.00-37,500.00-17,500.00tax savings33,000.0045,000.0015,000.007,000.00at maintenance-5,000.00-5,000.00-5,000.00-5,000.000.00residual value25,000.00free cash flow buy-250,000.0028,000.0040,000.0010,000.0032,000.00PV(loan)-255,000.0026,717.5636,419.798,687.9326,528.02-156,646.71After tax borrowing =.6*.08=4.8%Lease payments71,000.0071,000.0071,000.0071,000.00tax savings-28,400.00-28,400.00-28,400.00-28,400.000.00cash flow lease42,600.0042,600.0042,600.0042,600.000.00PV(lease)42,600.0040,648.8538,787.0837,010.570.00159,046.50lease vs. loan2,399.794) Treadmill Trucking Company is negotiating a lease for five new tractor/trailer rigs with Leasing International. Treadmill has received its best offer from Betterbilt Trucks for a total price of $1 million. The terms of the lease offered by International Leasing call for a payment of $205,000 at the beginning of each year of the 5-year lease. As an alternative to leasing, the firm can borrow from a large insurance company and buy the trucks. The $1 million would be borrowed on a simple interest loan at a 10 percent interest rate for 5 years. The trucks fall into the MACRS 5-year class and have an expected residual value of $100,000. Maintenance costs would be included in the lease. If the trucks were owned, a maintenance contract would be purchased at the beginning of each year for $10,000 per year. Treadmill plans to buy a new fleet of trucks at the end of the fifth year. Leasing International has a 40 percent federal-plus-state marginal tax rate, while Treadmill Trucking has a total tax rate of 20 percent. What is Treadmill's present value of the cost of owning? What is Treadmill's present value of the cost of leasing? Should Treadmill lease? ................
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