Trasky company is trying to decide whether it should

Reference no: EM13591150

Trasky Company is trying to decide whether it should purchase or lease a new automated machine to be used in the production of a new product. If purchased, the new machine would cost $100,000 and would be used for ten years. The salvage value at the end of ten years is estimated at $20,000. The machine would be depreciated using straight line depreciation over a seven year period. The annual maintenance and operating costs would be $20,000. Annual revenues are estimated at $55,000.

If the machine is leased, the company would need to pay annual lease payments of $20,700. The first lease payment and a deposit of $5,000 are due immediately. The last lease payment is paid at the beginning of Year 10. The deposit is refundable at the end of the tenth year. In additional, under a normal contract, the company must pay for all maintenance and operating costs, although the leasing company does offer a service contract that will provide annual maintenance (on leased machines only). The contract must be paid up front and costs $30,000. Trasky estimates that the contract will reduce its annual maintenance and operating costs by $10,000. Trasky's cost of capital is 14%. The tax rate is 40%. The service contract's costs would e expensed over the 10 year period. Assume this is an operating lease.

a. Calculate the NPV for the purchase, lease without the service contract, and the lease with the service contract.
b. Which is the best alternative?

Reference no: EM13591150

Questions Cloud

You are the cfo of diversied industries diversied has : you are the cfo of diversi?ed industries. diversi?ed has suffered through 4 or 5 tough years. this has deteriorated its

The optimal distribution policy strikes that balance : the optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the

You were hired as a consultant to giambono company whose : you were hired as a consultant to giambono company whose target capital structure is 40 debt 15 preferred and 45 common

Prepare best buys retained earnings statement for the year : the following financial data were adapted from the annual report of best buy inc. for the period ending february 28

Trasky company is trying to decide whether it should : trasky company is trying to decide whether it should purchase or lease a new automated machine to be used in the

In a physics lab experiment a compressed spring launches a : in a physics lab experiment a compressed spring launches a 26 g metal ball at a 25 degree angle. compressing the spring

The owners equity at the beginning of the period was 46000 : the owners equity at the beginning of the period was 46000 at the end of the period assets were 99000 and liabilities

For each item state whether it should be classified as a : the following items represent liabilities on a firms balance sheeta. an amount of money owed to a supplier based on the

A charged particle a exerts a force of 228 n to the right : question a charged particle a exerts a force of 2.28 ?n to the right on charged particle b when the particles are 12.1

User Account

All Pages