Big Sky Mining Company must install $1.5 million of new machinery in its Nevada moine. It can...

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Finance

Big SkyMining Company must install $1.5 million of new machinery in itsNevada moine. It can obtain a bank loan for 100% of the purchaseprice, or it can lease the machinery. Assume that the followingfacts apply.
(1)The machinery falls into the MACRS 3-year class.
(2) Undereither the lease or the purchase, Bug Sky must pay for insurance,property taxes, and maintenance.
(3)The firm's tax rate is 25%
(4) The loanwould have an interest rate of 15%. It would be nonamortirizing,with only interest paid at the end of each year for four years andthe principal repaidat Year 4.
(5) The leaseterms call for $400,000 payments at the end of the next 4years.
(6) Big SkyMining has no use for the machine beyond the expiration of thelease, and the machine has an estimated residual value of $250,000at the end of the 4th year.
a. What is the cost of owning?
b.What is the cost of leasing?
c.What is the NAL of the lease?

Answer & Explanation Solved by verified expert

4.5 Ratings (971 Votes)

Best way to answer these kind of questions is to create after tax cashflows and discount to present value a If machine is owned cashflows are as below Interest outgo 1515Mn 225k every year Adjusting for tax rate of 25 225075 16875k pa For MACRS 3 year class depreciation rates are See Answer

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Transcribed Image Text

Big SkyMining Company must install $1.5 million of new machinery in itsNevada moine. It can obtain a bank loan for 100% of the purchaseprice, or it can lease the machinery. Assume that the followingfacts apply.(1)The machinery falls into the MACRS 3-year class.(2) Undereither the lease or the purchase, Bug Sky must pay for insurance,property taxes, and maintenance.(3)The firm's tax rate is 25%(4) The loanwould have an interest rate of 15%. It would be nonamortirizing,with only interest paid at the end of each year for four years andthe principal repaidat Year 4.(5) The leaseterms call for $400,000 payments at the end of the next 4years.(6) Big SkyMining has no use for the machine beyond the expiration of thelease, and the machine has an estimated residual value of $250,000at the end of the 4th year.a. What is the cost of owning?b.What is the cost of leasing?c.What is the NAL of the lease?