Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain...

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Finance

Sadik Industries must install $1 million of new machinery in itsTexas plant. It can obtain a bank loan for 100% of the requiredamount. Alternatively, a Texas investment banking firm thatrepresents a group of investors believes that it can arrange for alease financing plan. Assume that these facts apply:
1.The equipment falls in the MACRS 3-year class.
2. Estimated maintenance expenses are $46,000 per year.
3.The firm's tax rate is 30%.
4.If the money is borrowed, the bank loan will be at a rate of 13%,amortized in six equal installments at the end of each year.
5.The tentative lease terms call for payments of $280,000 at theend of each year for 3 years. The lease is a guideline lease.
6.Under the proposed lease terms, the lessee must pay forinsurance, property taxes, and maintenance.
7.Sadik must use the equipment if it is to continue in business, soit will almost certainly want to acquire the property at the end ofthe lease. If it does, then under the lease terms it can purchasethe machinery at its fair market value at Year 3. The best estimateof this market value is $230,000, but it could be much higher orlower under certain circumstances. If purchased at Year 3, the usedequipment would fall into the MACRS 3-year class. Sadik wouldactually be able to make the purchase on the last day of the year(i.e., slightly before Year 3), so Sadik would get to take thefirst depreciation expense at Year 3 (the remaining depreciationexpenses would be at Year 4 through Year 6). On the time line,Sadik would show the cost of the used equipment at Year 3 and itsdepreciation expenses starting at Year 3.
Year 3-year MACRS
1) 33.33 %
2) 44.45 %
3) 14.81 %
4) 7.41 %
What is the net advantage of leasing? Do not roundintermediate calculations. Round your answer to the nearestdollar.

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4.3 Ratings (669 Votes)

OPTION 1 BUY THE EQUIPMENT 100 FINANCEPARTICULARSY1Y2Y3Y4Y5Y6APRINCIPLE REPAYMENT1201531357731534241733691959072213751000000BINTEREST ELEMENT NET OF TAX910008006667711537493797320145350644CMAINTENANCE COST NET OF TAX 46000 X 07322003220032200322003220032200193200DSAVING OF TAX ON See Answer

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Sadik Industries must install $1 million of new machinery in itsTexas plant. It can obtain a bank loan for 100% of the requiredamount. Alternatively, a Texas investment banking firm thatrepresents a group of investors believes that it can arrange for alease financing plan. Assume that these facts apply:1.The equipment falls in the MACRS 3-year class.2. Estimated maintenance expenses are $46,000 per year.3.The firm's tax rate is 30%.4.If the money is borrowed, the bank loan will be at a rate of 13%,amortized in six equal installments at the end of each year.5.The tentative lease terms call for payments of $280,000 at theend of each year for 3 years. The lease is a guideline lease.6.Under the proposed lease terms, the lessee must pay forinsurance, property taxes, and maintenance.7.Sadik must use the equipment if it is to continue in business, soit will almost certainly want to acquire the property at the end ofthe lease. If it does, then under the lease terms it can purchasethe machinery at its fair market value at Year 3. The best estimateof this market value is $230,000, but it could be much higher orlower under certain circumstances. If purchased at Year 3, the usedequipment would fall into the MACRS 3-year class. Sadik wouldactually be able to make the purchase on the last day of the year(i.e., slightly before Year 3), so Sadik would get to take thefirst depreciation expense at Year 3 (the remaining depreciationexpenses would be at Year 4 through Year 6). On the time line,Sadik would show the cost of the used equipment at Year 3 and itsdepreciation expenses starting at Year 3.Year 3-year MACRS1) 33.33 %2) 44.45 %3) 14.81 %4) 7.41 %What is the net advantage of leasing? Do not roundintermediate calculations. Round your answer to the nearestdollar.