Wolfson Corporation has decided to purchase a new machine that costs $5.1 millio

Question

Wolfson Corporation has decided to purchase a new machine that costs $5.1 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 $5.1 million. The repayment schedule is four yearly principal repayments of $1,275,000 and an interest charge of 6 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 $1,425,000 per year are due at the beginning of each of the four years of the lease. a. What is the NAL of leasing for Wolfson? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NAL $ b. What is the maximum annual lease payment Wolfson would be willing to pay? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Annual lease payment $

Explanation / Answer

(a) Net present value of Purchasing:

The loan Amortization schedule is as follows:

The NPV of Purchasing is shown in the below Table:

NPV of leasing at 6% = PV(0.06,4,1425000)= $ 4,937,775.50

So Net advantage to leasing = $ 2,449,194.21 - $ 4,937,775.50 = - 2,488,581.29 (Negative)

(b) Maximum Lease amount Walfson = pmt(0.06,4,2449194.21) = 706,816.61

Maximum Lease amount Walfson = $706,816.61

Year Loan Principal Loan Interest Outstanding 0 5100000 1 1275000 306000 3825000 2 1275000 229500 2550000 3 1275000 153000 1275000 4 1275000 76500 0

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