Annual depreciation deduction for purchase alternative

Assignment Help Financial Management

Reference no: EM131356058

Barclay Polymers needs to acquire a new extruding machine whose purchase price is $ 600,000. However, the firm could lease the extruder from Primal Leasing Corporation for a 5-year period and make annual payments of $ 115,000 at the beginning of the year. If the extruder is leased , then Primal Leasing Corporation would pay all maintenance costs and Barclay would have the opportunity to purchase the asset for $ 130,000 at the beginning of year 5. If the extruder is purchased by Barclay, then it will be financed with a 5-year loan at an annual rate of 8.75%. Barclay would use the MACRS depreciation method over a 5-year recovery period, would purchase a service contract for $ 8,000 a year, and would keep the extruder after its recovery period. If the firm pursues the purchase alternative, then it would secure a maintenance contract at an expected cost of $ 3,000 annualy, The firm is in a 35% tax bracket.

1- Calculate the annual after-tax cash flow for the leasing alternative.

2- Determine the annual interest and principal payments for the purchase alternative.

3- Determine the annual depreciation deduction for the purchase alternative.

4- Calculate the net present value of both the leasing and the purchase alternatives.

Reference no: EM131356058

Questions Cloud

When estimating cost of debt capital for firm : When estimating the cost of debt capital for a firm, we are primarily interested in

Uses the subjective approach and applies adjustment factor : Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $5.9 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The cost-saving proposal is somewhat ris..

Evauluating the merits of potential investment : Dave is evauluating the merits of a potential investment in a drone manufacturing company. He already owns the land for the facility, but he would need to purchase and instill the assembly machinery for $240,000. Dave's WACC for an average-risk proje..

Which ratios are imperative to complete a ratio analysis : Can an acid test ratio be completed without accounts receivable being available? Which ratios are imperative to complete a ratio analysis on a company? A bond with a 9% coupon that pays interest semi annually and is priced at par will have a market p..

Annual depreciation deduction for purchase alternative : Barclay Polymers needs to acquire a new extruding machine whose purchase price is $ 600,000. However, the firm could lease the extruder from Primal Leasing Corporation for a 5-year period and make annual payments of $ 115,000 at the beginning of the ..

When estimating the cost of debt capital for a firm : When estimating the cost of debt capital for a firm, we are primarily interested in

The after-tax cost of debt from the firm : Your firm is considering a new investment proposal and would like to calculate the weighted average cost of capital. to help in this, compute the cost of capital for the firm for the following: A bond that has a $1,000 par value (face value) and a co..

What is the dividend paid by stock : The preferred stock of Acme International is selling currently at $110. If your required rate of return is 10 percent, what is the dividend paid by this stock? Bellamee Company has bonds outstanding with five years to maturity and a face value of $5,..

The preferred stock of acme international : The preferred stock of Acme International is selling currently at $110. If your required rate of return is 10 percent, what is the dividend paid by this stock?

User Account

All Pages