D+6 ezto.mheducation.com/hm.tpx?0.810315559071172 1512227030348-Chapter 21 Probl
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D+6 ezto.mheducation.com/hm.tpx?0.810315559071172 1512227030348-Chapter 21 Probli Chapter 21 Problems INANCE ter 21 Problems Question 3 (of 3) value: 8.34 points Super Sonics Entertainment is considering buying a machine that costs $610,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $180,000. The company can issue bonds at an interest rate of 9 percent The corporate tax rate is 30 percent What is the NAL of the lease? (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.) References eBook & Resources Worksheet Section: 21.07 Debt Displacement and Lease Valuation Difficulty: 1 Basic Section: 21.08 Does Loasing Ever Pay? The Base Case Check my workExplanation / Answer
NAL(Net Advantage to Leasing) refers to amount of money saved as a result of leasing the asset.
It is caluclated by subtracting the Net Present Value of the Lease Amount from the Initial Cost.
Cost = $610,000
Deprecition is calculate by Straight Line Method and Salvage Value is zero. So each year Deprecition = $610,000/5= $122,000
Tax Rate = 30% , So Depreciation Tax shield is $122,000 *0.3 = $36,600
Each year Lease Payment = $180,000
After deducting tax Rate, Lease Rate = $180,000(1-0.3) = $126,000
Total Cash Flow= After Tax Lease Rate + Depreciation Tax Shield = $126,000 + $36,600= $162,600
Interest Rate on Bonds = 9%
After Tax I.R. = 9% (1-0.3) = 6.3%
NAL = Cost of Asset - Net Present Value of Cash Flow = $610,000 - $162,600 (PVIFA 6.3, 5)
= $610,000- $162,600 (4.1782) = -$69,375.32
Remember to put negative sign as mentioned in the question.
Hope it helps !
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