TQ10 - leasing - these are all the question in this week PDF

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Corporate Finance (FINM2001)

Tutorial Ten - Questions Question One Problem 25.1, pg. 945. Suppose an H1200 supercomputer has a cost of $300,000 and will have a residual market value of $75,000 in four years. The risk-free interest rate is 6.1% APR with monthly compounding. a) What is the risk-free monthly lease rate for a five-year lease in a perfect market? b) What would be the monthly payment for a five-year $300,000 risk-free loan to purchase the H1200? Question Two Problem 25.2, pg. 945. Suppose the risk-free interest rate is 5.7% APR with monthly compounding. If a $2.8 million MRI machine can be leased for five years for $48,000 per month, what residual value must the lessor recover to break even in a perfect market with no risk? Question Three Problem 25.3, pg. 945. Consider a six-year lease for a $350,000 bottling machine, with a residual market value of $122,500 at the end of the six years. If the risk-free interest rate is 5.9% APR with monthly compounding, compute the monthly lease payment in a perfect market for the following leases: c) A fair market value lease d) A $1.00 out lease e) A fixed price lease with an $50,000 final price Question Four Problem 25.6, pg. 946. Craxton Engineering will either purchase or lease a new $752,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the fabricator for $131,000 per year for seven years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of the seven years.) a) What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease? b) What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease? c) What are the incremental free cash flows of leasing versus buying?

Question Five Problem 25.7, parts (a) and (b), pg. 946.

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Corporate Finance (FINM2001)

Riverton Mining plans to purchase or lease $290,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $66,152 per year for five years. Assume Riverton’s borrowing cost is 7%, its tax rate is 35%, and the lease qualifies as a true tax lease. a) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan? b) Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent loan?

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