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# FI516_WEEK_5_HOMEWORK_ANSWER_KEY - FI-516 WEEK 5 HOMEWORK...

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FI-516 WEEK 5 HOMEWORK ANSWER KEY Problem 18 – 4 18-4 I. Cost of Owning: 0 1 2 3 4 After-tax loan payments a (\$135,000) (\$135,000) (\$135,000) (\$1,635,000) Depr. tax savings b \$198,000 \$270,000 \$90,000 \$42,000 Residual value \$250,000 Tax on residual (\$100,000) Net cash flow \$0 \$63,000 \$135,000 (\$45,000) (\$1,443,000) PV cost of owning at 9% (\$885,580.87) II. Cost of Leasing: 0 1 2 3 4 Lease payment (AT) (240,000) (240,000) (240,000) (240,000) Net cash flow \$0 (240,000) (240,000) (240,000) (240,000) PV cost of leasing at 9% (\$777,532.77) III. Cost Comparison Net advantage to leasing (NAL) = PV cost of owning – PV cost of leasing = \$885,580.87- \$777,532.77 = \$108,048.10. a After-tax interest payments = (0.15)(\$1,500,000)(1-0.40) = \$135,000. b Depreciation tax savings, base on MACRS 3-year life and \$1,500,000 cost of new machinery:. MACRS Deprec. Tax Savings Year Allowance Factor Depreciation T (Depreciation) 1 0.33 \$495,000 \$198,000 2 0.45 675,000 270,000 3 0.15 225,000 90,000 4 0.07 105,000 42,000 Since the cost of leasing the machinery is less than the cost of owning it, Big Sky Mining

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FI516_WEEK_5_HOMEWORK_ANSWER_KEY - FI-516 WEEK 5 HOMEWORK...

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