1 Anderson equipment Company is considering a case analysis on some assembly line equipment that it will procure in the

[answerhappygod]

1 Anderson Equipment Company Is Considering A Case Analysis On Some Assembly Line Equipment That It Will Procure In The 1 (100.33 KiB) Viewed 95 times

1 Anderson equipment Company is considering a case analysis on some assembly line equipment that it will procure in the coming year. The following data have been developed. 1. Anderson plans to acquire automated assembly line equipment with a 10-year life and a cost of $10 million, celivered and installed. Ilowever, Anderson plans to use the equipment for only live years, Iur it will discuritinue the product line at that time. 2. Anderson can borrow the required $10 million at a ticfore tax cost of 10 percent. 3. The equipment's estimated scmp value is $50,000 after 10 years of use, but its slynge value after five years of use is $1 million 4. Anderson can lease the equipment for five years at a rental charge of S2,75 million per year payable at the beginning of each year, but the Tessor will own the equipment upon expiration of the lease. 5. The lease contract stipulates that the lessor will maintain the equipment at no additional charge to Anderson. I lowever, if Anderson borrows and truys, it will have to bear the cost of maintenance, which will be performed by the equipment manufacturerat a fixed contract rote of $.100,000 per year payable at the brginning of each year. The maintenance cost tn Anderson is tax deductiblc. 6. The equipment falls under the MACRS 5 year class life. Anderson's marz nal tax rate is 40 percent and the lease qualifies for a guideline lease. BUY Initial cost Life- Plerned User Scrap: Valle (year 10)- Salvage vue (year 5- Maintanence costa $ 10,000,000 20 years 5 years $50,000 $ 1,000,000 $ SOD,ODO at the beginning LEASE Rental charges Maintancnor cost $ 2,750,000 paid by Icssor Depreciation MACRS 5-year dass Tax- 40% Should Anderson leueur try the wembly fine equipment? Make your decision based un the NPV and IRR analyses. 10% Cost of debt before taxes Kd BT- Kd AT-Kdº(1-T) 6.00% Cost of debt after taxes LESSE'S ANALYSIS 0 1 2 3 4 5 BV A. Lease Lease Payments Payment tax savine Net Cash Flow (NCF) Icase Depreciation Schedule 1 2 2 3 4 5 6 Depreciation 2056 3256 1956 1256 12% 5% B. Buy Net Purchase Price Less: Maintenance cast Add:Maintenance tax savings Add:Depreciation tax savings Add: Salvage Value Less Tax effect on sale Nct Cash Flow (NCF) buy Cash Flow at the end of year 5 Salvage Value BV Pratit Tax Net Cash Flow I CANCE=NCF lease-NCF buy After-tax cost of debt Net advartage to Leasing. (NPV) IRR LESSOR'S ANALYSIS B. Buy Net Purchase Price Less: Maintenance cost Add:Maintenance tax savings Add:Depreciation tax savings Add: Salvage Value Less:Tax effect on sale Net Cash Flow (NCF) buy casc Pmt Receive Less:Tax on Lease Pmt CA NCFENCF lease-NCF buy After-tax cost of debt Net advantage to Leasing (NPV) IRR Opportunity Return of Investment AT Opportunity return from investment