Morris-Meyer Mining Company must install $1.7 million of new machinery in its Ne
ID: 2723943 • Letter: M
Question
Morris-Meyer Mining Company must install $1.7 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the required amount. Alternatively, a Nevada investment banking from that represents a group of investors believes that it can arrange for a lease financing plan. Assume that the following facts apply:
The equipment falls in the MACRS 3-year class. The applicable MACRS rates are 33%, 43%, 17%, and 9%.
Estimated maintenance expenses are $80,000 per year.
Morris-Meyer's federal-plus-state tax rate is 40%.
If the money is borrowed, the bank loan will be at a rate of 17%, amortized in 4 equal installments to be paid at the end of each year.
The tentative lease terms call for end-of-year payments of $250,000 per year for 4 year.
Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance.
The equipment has an estimated salvage value of $250,000, which is the expected market value after 4 years, at which time Morris-Meyer plans to replace the equipment regardless of whether the firm leases or purchases it. The best estimate for the salvage value is $250,000, but it may be much higher or lower under certain circumstances.
To assist management in marking the proper lease-versus-buy decision, you are asked to answer the following questions.
Assuming that the lease can be arranged, should Morris-Meyer lease or borrow and buy the equipment? Explain. Round your answer to the whole number.
Net advantage to leasing (NAL) is $ . (Input the minus sign if the cost of leasing the machinery is more than the cost of owning it.)
Explanation / Answer
As the Net Present Value is positive , it is more beneficial to lease than to buy the asset.
I Option of obtaining a Bank Loan 1700000=(PMT*(1-(1+0.17)^-4)/0.17) PMT= 619706 Year Tow.Principal Tow. Interest Annual Instalment Balance Pending 0 1700000 1 330706 289000 619706 1369294 2 386926.02 232779.98 619706 982368 3 452703 167003 619706 529665 4 529663.0288 90043 619706 2 1699998.492 778826 2478824Related Questions
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