Finance

#.-q"6) Build a Model: Lessee's Analysis including delivery and installation from the bank through a 4-year Reod nrai C..lr,;e otastDq; e th*tJ}u F Part 8 Tactical Financial Decisions Start with the partiai model in the file Ch19 PA6 Build a on the textbook s Web site. As part of its overall plant modernization and cost program, Western Fabrics"s management has decided to install a new weaving loom- In the capital budgeting analysis of this equipment, the IRR project was found to be 20% versus the project's required return of 12%. The loom has an invoice price of . The funds needed could be ized ioan at a L|Ya interest payments to be made at the end of each yea n the event the loom is the manufacturer will contract to maintain and ice it for a fee of per year paid at the end of each year. The loom falls in t is 40%. MACRS S-vear and Western's marginal federal-plus-state tax rate Aubey Autom for $70,000 upon ,, maker of the loom, has offered to lease the loom to Western and installation (at t = 0) plus four additional annual lease payments of be made at the end of Years 1 to 4. (Note that there are five lease payments i ) The agreement includes maintenance and servicing. The loom has an life of 8 at which time its expected salvage value is zero; however, after its market value is' ted to equal its book value of $42,500, Western plans an entirely new plant in , so it has no interest in either leasing or owning proposed ioom for more than a.

b. Should the loom be leased or pur The salvage value is clearly the most cash flow in the analysis. What effect would a salvage value risk adjustment have on the analysis? (Assume that the appropriate salvage value pre-tax discount rate 15%.) c. Assuming that the after-tax cost of debt should be used to discount all anticipated cash flows, at what lease payment would the firm be indifferent to either leasing or buying? Lewis Securities Iuc. has decided to acquire a nelv market data and quotation system for its Richmond home office. The system receives current market prices and other informa- tion from several online data services and then either displays the infbrmation on a screen or stores it for later retrieval by the firm's brokers. The system also permits customers to cail up current quotes on terminals in the lobby. The equipment costs $1,000,000 and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a l07o interest rate. Although the equioment has a 5- year usefirl life, it is classified as a special-puryose computer and therefore falls into the MACRS 3-year class. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment rvould be sold after 4 years, atd the best estimate of its residual value is $ZO0,OOO. However, because real-tirne display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a -year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each vear. l.ewis's marginal federal-plus-state tax rate is 40%. You have by Gmd Cmyor Univereity.