Sadik Industries must install $1 million of new machinery in its
Texas plant. It can obtain a bank loan for 100% of the required
amount. Alternatively, a Texas investment banking firm that
represents a group of investors believes that it can arrange for a
lease financing plan. Assume that these facts apply:
The data has been collected in the Microsoft Excel Online file
below. Open the spreadsheet and perform the required analysis to
answer the
questions below.
- Sadik Industries Must Install 1 Million Of New Machinery In Its Texas Plant It Can Obtain A Bank Loan For 100 Of The 1 (158.85 KiB) Viewed 175 times
Lease versus Buy Cost of machinery Bank loan amount as % of cost $1,000,000 100.00% MACRS Depreciation Rates: Year 1 Year 2 44.45% Year 3 14,81% Year 4 7.41% 33.33% Estimated annual maintenance expenses Length of lease term (in years) Annual end-of-year lease payments Lessee pays for insurance, property taxes, and maintenance Machinery fair market value at Year 3 Firm's tax rate Bank loan rate Length of loan term (in years) for annual end-of-year payments $46,000 3 $280,000 Yes $170,000 40.00% 14.00% 6 Borrow and Buy Analysis: Depreciation Schedule of New Machinery: Depreciation expense Book value of new machinery Year 1 $333,300 $666,700 Year 2 $444,500 $222,200 Year 3 $148,100 $74,100 Year 4 $74,100 $0 Year 1 $1,000,000 Year 2 $0 0 Year 3 $0 0 Year 4 SO 0 Year 5 $0 0 0 Year 6 $0 0 Amortization Schedule of Loan: : Beginning loan balance Loan payment Interest payment Principal payment Ending loan balance Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cost of Owning: Purchase price of machinery Loan proceeds Loan payments Interest tax savings Depreciation tax savings Net cash flow 0 0 0 0 0 $0 $0 $0 SO $0 SO SO PV of ownership Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Depreciation Schedule of Used Machinery: Depreciation expense Book value of used machinery 170,000 170,000 170,000 170,000 Year 0 Year 1 Year 3 Year 4 Year 5 Year 6 Year 2 $0 $0 Cost of Leasing Machinery: After-tax lease payment Fair market value of machinery Depreciation tax savings Net cash flow $0 $0 $0 $0 SO $O SO PV of leasing Net advantage of leasing Should the firm lease the machinery?