a 5 year operating lease with annual payments in advance of 15 000 327454

Aug 29, 2021 | Uncategorized

Company that is about to acquire an item of plant.

  • A 5 year operating lease with annual payments in advance of $15,000.
  • Included in the lease cost is a maintenance warrantee for the term of the lease.
  • Insurance of the plant are the responsibility of the lessee. The annual cost of insurance is estimated at $1,200 per year.
  • The company tax rate is 35% and the company’s cost of capital is 12%.
  • The bank has indicated that they will charge 8% on moneys borrowed.
  • Under the purchase option, the plant will be depreciated straight line over five years with an estimated residual value equal to 25% of the original cost. Assume the plant is sold at the end of 5 years.
  • The market price of the plant is $70,000.
  • An initial deposit of 20% is required for the purchase option.
  • Assume annual compounding with instalment on the purchase option in arrears
  • Assume that tax is paid or received in the same year of the transaction or event.
  • The plant comes with a 3 year manufacturer’s warrantee after which it will cost the company an annual maintenance charge of $2,500 paid in advance.
  1. Calculate the net present value (NPV) for the lease and purchase option and make a recommendation as to which alternative is best. (Show workings)
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Company that is about to acquire an item of plant. A 5 year operating lease with annual payments in advance of $15,000. Included in the lease cost is a maintenance warrantee for the term of the lease. Insurance of the plant are the responsibility of the lessee. The annual cost of insurance is estimated at $1,200 per year. The company tax rate is 35% and the company’s cost of capital is 12%. The bank has indicated that they will charge 8% on moneys borrowed. Under the purchase option, the plant will be depreciated straight line over five years with an estimated residual value equal to 25% of the original cost. Assume the plant is sold at the end of 5 years. The market price of the plant is $70,000. An initial deposit of 20% is required for the purchase option. Assume annual compounding with instalment on the purchase option in arrears Assume that tax is paid or received in the same year of the transaction or event. The plant comes with a 3 year manufacturer’s warrantee after which it will cost the company an annual maintenance charge of $2,500 paid in advance. Calculate the net present value (NPV) for the lease and purchase option and make a recommendation as to which alternative is best. (Show workings)

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