Answer Happy

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.
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?