Verify that proposed project will yield forecasted retuns

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Reference no: EM131319662

Assume that you are the newly hired assistant to the head of the corporate finance division and have been asked to review the project proposed from the Malone Division.

(1) Verify that the proposed project will yield the forecasted retums (more than 28% before tax and more than 19% after tax).

(2) Compute the before- and after-tax ROl for the Malone Division for each of the next five years for both the purchase and the lease options. The investment base for each year is the book value (using straight-line depreciation) of investment at the start ofthe year.

(3) At the company's after-tax cost of capital of 14%, is it better to purchase or lease the asset?

(4) Why does the leasing option generate higher ROl measures than the purchase option?

(5) Suggest an alternative scheme that will reduce the incentive to lease rather than to purchase assets. Demonstrate how your scheme would work were the Malone Division to enter into the five-year lease with annual payments of $5,200,000.

Reference no: EM131319662

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