Chapter 27

Problems 1-12
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green
NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-in" be installed in Excel. To install these, click on "Tools|Add-Ins" and select "Analysis ToolPak" and "Solver Add-In."

sis ToolPak"

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Question 1-5 Input Area:

Cost Life of machine Lease price Borrowing rate Tax rate

$ $

5,800,000 4 1,740,000 8% 35%

Output Area:

1) Depreciation tax shield Aftertax cost of debt Aftertax lease payment Total cash flow NAL You should lease.

$ $ $ $

507,500 5.20% 1,131,000 1,638,500 16,851.25

2) NAL

(16,851.25)

3) Breakeven lease payment

$ 1,747,345.15

4) If the tax rate is zero, there is no depreciation tax shield foregone; the aftertax lease payment is the same as the pretax payment, and the aftertax cost of debt is the same as the pretax cost. NAL $ 36,899.30

5) From #3, the lessor breaks even with a payment of $ 1,747,345.15 Lessee breakeven $ 1,751,140.67

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Question 6 Input Area:

Cost Life of machine Lease price Borrowing rate Tax rate MACRS schedule

$ $

5,800,000 4 1,740,000 8% 35% 0.3333 0.4445 0.1481 0.0741

Output Area:

Aftertax lease payment Aftertax borrowing rate Year 1 1 2 3 4

$ $ $ $

1,131,000 5.20% Leasing CF 1,807,599 2,033,335 1,431,643 1,281,423

NAL $ (31,441.66) The machine should not be leased.

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Question 7 Input Area:

Pretax cost savings System cost Useful life Tax rate Borrowing rate Lease payments

$ $

1,750,000 8,000,000 5 34% 9% 1,900,000

Output Area:

The pretax cost savings are not relevant in the lease versus buy decision, since the firm will definitely use the equipment and realize the savings regardless of the financing choice made. Dep. tax shield lost Aftertax cost of debt Aftertax lease payment $ $ 544,000 5.94% 1,254,000

NAL $ 99,509.86 The company should lease the equipment. NAL w/o lease payment Aftertax lease payment Pretax lease payment $ 5,704,728.92 $ 1,276,262.35 $ 1,933,730.84

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Question 8 Input Area:

Pretax cost savings System cost Useful life Tax rate Borrowing rate Lease payments Aftertax residual value

$ $

$ $

1,750,000 8,000,000 5 34% 9% 1,900,000 500,000

Output Area:

The aftertax residual value of the asset is a cost to the leasing decision, occurring at the end of the project life (Year 5). Also, the residual value is not really a debt-like cash flow, since there is uncertainty associated with it at year 0. Nevertheless, although a higher discount rate may be appropriate, we'll use the aftertax cost of debt to discount the residual value as is common in practice. Dep. tax shield lost Aftertax cost of debt NAL w/o lease payment Aftertax lease payment Pretax lease payment $ 544,000 5.94% 5,330,040.60 1,192,437.06 1,806,722.81

$ $ $

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Question 9 Input Area:

Pretax cost savings System cost Useful life Tax rate Borrowing rate Lease payments Security deposit

$ $

$ $

1,750,000 8,000,000 5 34% 9% 1,900,000 200,000

Output Area:

Dep. tax shield lost Aftertax cost of debt Aftertax lease payment

$ $

544,000 5.94% 1,254,000

NAL $ 49,385.19 The firm should lease the equipment.

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Question 10 Input Area:

Cost Life of machine Tax rate Lessee borrowing rate

330,000 3 34% 9%

Output Area:

b. Aftertax cost of debt Depreciation tax shield PV of depreciation tax shield Pretax payment Lease payment c. Maximum lessor payment

$ $ $ $ $

5.94% 37,400.00 100,081.73 85,919.21 130,180.63 130,368.07

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Question 11 Input Area:

Base capitalized cost Other costs Down payment Residual value Lease factor Term of lease (months) Tax rate

$ $ $ $

35,000 450 2,000 21,500 0.00295 36 7%

Output Area:

APR Net capitalization cost Depreciation payment Finance fee Taxes Total monthly lease payment $ $ $ $ $

7.08% 33,450.00 331.94 162.10 34.58 528.63

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Question 12 Input Area:

Cost Life of machine Lease price Borrowing rate Tax rate

$ $

5,800,000 4 1,740,000 8% 35%

Output Area:

Loan payment Total payments (from #1) Aftertax cost of debt Year 1 2 3 4

$ 1,751,140.67 $ 1,638,500.00 5.20% Beginning balance $ 5,800,000.00 4,512,859.33 3,122,747.42 1,621,426.54 Total payment $ 1,751,140.67 1,751,140.67 1,751,140.67 1,751,140.67 Interest payment $ 464,000.00 361,028.75 249,819.79 129,714.12 Principal payment $ 1,287,140.67 1,390,111.92 1,501,320.87 1,621,426.54 Ending balance $ 4,512,859.33 3,122,747.42 1,621,426.54 -

Aftertax payment = Loan payment - interest tax shield Year Total cash flow 1 $ 1,588,740.67 $ (49,759.33) 2 $ 1,624,780.60 $ (13,719.40) 3 $ 1,663,703.74 $ 25,203.74 4 $ 1,705,740.72 $ 67,240.72 NAL $16,851.25

The NAL is the same because the present value of the aftertax loan payments, discounted at the aftertax cost of capital (which is the aftertax cost of debt) equals $ 5,800,000