FI516_WEEK_5_HOMEWORK_ANSWER_KEY

FI516_WEEK_5_HOMEWORK_ANSWER_KEY - FI-516 WEEK 5 HOMEWORK...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: FI-516 WEEK 5 HOMEWORK ANSWER KEY Problem 18 4 18-4 I. Cost of Owning: 0 After-tax loan paymentsa Depr. tax savingsb Residual value Tax on residual Net cash flow 1 ($135,000) $198,000 $63,000 2 ($135,000) $270,000 $135,000 3 ($135,000) $90,000 ($45,000) 4 ($1,635,000) $42,000 $250,000 ($100,000) ($1,443,000) $0 PV cost of owning at 9% II. Cost of Leasing: 0 Lease payment (AT) Net cash flow $0 ($885,580.87) 1 (240,000) (240,000) 2 (240,000) (240,000) 3 (240,000) (240,000) 4 (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 b After-tax interest payments = (0.15)($1,500,000)(1-0.40) = $135,000. Depreciation tax savings, base on MACRS 3-year life and $1,500,000 cost of new machinery:. MACRS Allowance Factor 0.33 0.45 0.15 0.07 Depreciation $495,000 675,000 225,000 105,000 Deprec. Tax Savings T (Depreciation) $198,000 270,000 90,000 42,000 Year 1 2 3 4 Since the cost of leasing the machinery is less than the cost of owning it, Big Sky Mining should lease the equipment. Problem 18-3: a) .Balance sheets before lease is capitalized: Energen Balance Sheet (Owns new assets) (Thousands of Dollars) Current assets Fixed assets Total assets $ 25,000 175,000 $200,000 Debt Equity Total claims $100,000 100,000 $200,000 Debt/assets ratio = $100/$200 = 50%. Hastings Corporation Balance Sheet (Leases as operating lease) (Thousands of Dollars) Current assets Fixed assets Total assets $ 25,000 125,000 $150,000 Debt Equity Total claims Debt/assets ratio = $50/$150 = 33%. b. Balance sheet after lease is capitalized: Hastings Corporation Balance Sheet (Capitalizes lease) (Thousands of Dollars) Current assets Value of leased asset Fixed assets Total assets $ 25,000 50,000 Debt PV of lease $ 50,000 50,000 100,000 $200,000 $ 50,000 100,000 $150,000 payments 125,000 Equity $200,000 Total claims Debt/assets ratio = $100/$200 = 50%. ...
View Full Document

This note was uploaded on 10/13/2011 for the course MAFM FI516 taught by Professor Anthonycriniti during the Spring '10 term at Keller Graduate School of Management.

Page1 / 3

FI516_WEEK_5_HOMEWORK_ANSWER_KEY - FI-516 WEEK 5 HOMEWORK...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online