80.2K

Verified Solution

Link Copied!

High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $83,000 for five years, due at the beginning of each year. This machine will save Farmer $30,500 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $387,000. This machine will save $32,500 per year in electricity costs. A local bank has offered to finance the machine with a $387,000 loan. The interest rate on the loan will be 6 percent on the remaining balance and will require five annual principal payments of $77,400. Farmer has a target debt-to-asset ratio of 62 percent and a tax rate of 23 percent. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis. a. What is the NAL of leasing? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much debt is displaced by this lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NAL b. PV

Answer & Explanation Solved by verified expert

See Answer