Compute the NPV for each option and based on the cost

Assignment Help Financial Management

Reference no: EM132063952

Your boss asks you to review an option to lease an equipment storage facility that the firm needs. You are to compare it with the purchase of the facility. The following information are pertinent to your decision:

a) The facility will be needed for nine years

b) If the facility is leased, the lessor will conduct all maintenance; if purchased, your firm must conduct maintenance

c) Facility maintenance is expected to cost $66000 per year

d) The cost to lease the facility is $400000 per year at the beginning of each year

e) The purchase price of the facility is $5000000 and the market value at the end of nine years is expected to be $4000000

f) The before-tax cost of debt is 7%, and the tax rate is 35%

g) The company's current EBIT is $1750000 (before leasing or purchasing the facility)

1) Assuming that the facility has a nine-year depreciation life for tax purposes (i.e. it can be fully depreciated 7 over nine-years), compute the NPV for each option and based on the cost, indicate your decision (round to nearest $1,000).

A) BUY; BUY NPV = -1892000, LEASE NPV = -2285000

B) BUY; BUY NPV = -2018000, LEASE NPV = -2159000

C) none of them

D) LEASE; LEASE NPV = -2018000, BUY NPV = -2159000

2) Assuming that the facility has a seven-year depreciation life for tax purposes (i.e. it will not be fully 8 depreciated by end of nine years), compute the NPV for each option and based on the cost, indicate your decision (round to nearest $1,000).

A) LEASE; LEASE NPV = -2018000, BUY NPV = -2099000

B) BUY; BUY NPV = -2018000, LEASE NPV = -2099000

C) BUY; BUY NPV = -1892000, LEASE NPV = -2225000

D) none of them

3) Assuming that the facility has a fifteen-year depreciation life for tax purposes (i.e. it will not be fully depreciated by end of nine years), compute the NPV for each option and based on the cost, indicate your decision (round to nearest $1,000).

A BUY; BUY NPV = -1851000, LEASE NPV = -2018000

B LEASE; LEASE NPV = -1851000, BUY NPV = -2018000

C BUY; BUY NPV = -1892000, LEASE NPV = -1977000

D LEASE; LEASE NPV = -1892000, BUY NPV = -1977000

Please show calculation in Excel on how to get the answer and show the function page.

Reference no: EM132063952

Questions Cloud

Different ways for different coupon mortgage securities : In a Graduation Payment mortgage arrangement. prepayment affects price in different ways for different coupon mortgage securities.

Will independent agency systems disappear : Will independent agency systems disappear? What are the challenges that they may face?

Calculate return on equity and earnings per share : Calculate return on equity and earnings per share if expansion is financed by equity.

Define and explain operating leverage and financial leveage : Define and explain operating leverage and financial leveage?

Compute the NPV for each option and based on the cost : Assuming that the facility has a nine-year depreciation life for tax purposes. Compute the NPV for each option and based on the cost, indicate your decision

Increase in revenue next year from the new equipment : what will be the increase in revenue next year from the new equipment?

How much should the minimum annual lease payments be : how much should the minimum annual lease payments be? Assume further that it can borrow at a before-tax rate of 7%.

The variance in the present value of the cash flows : The variance in the present value of the cash flows is 0.1. While the opportunity cost of the project is 7%, the (continuously compounded) risk-free rate is 2%.

Estimate which two debt restructures maximize firm value : Estimate which two debt restructures maximize firm value.

User Account

All Pages