Reference no: EM132919743
Question - Big Bucks Inc. (BBI) has decided to replace its outdated information system, which has no resale value. It is now considering 2 choices: 1) purchase the necessary data network infrastructure equipment and desktop computers, or 2) lease all the equipment and computers.
Purchase option - The data network infrastructure equipment costs $1 million, while the desktop computers cost $200,000. The CCA rates are: equipment = 30% and computers = 45%. BBI can finance the $1.2 million purchase with a 4-year bank term loan at a stated interest rate of 10% per year. The network equipment will be kept forever but the computers will be sold for $10,000 (relatively uncertain) at the end of year 4. BBI will incur pre-tax maintenance costs of $20,000 per year. These operating costs are incurred at the end of a year and are for the purchase option only.
Lease option - The lease provided by the manufacturer will require payments of $350,000 per year for 4 years, to be paid at the beginning of each year (the first payment will be made at the same time as the lease contract is signed), while operating cash flows and the tax payments will occur at the end of each year. The maintenance costs are included in the lease contract. The required rate of return for the manufacturers' leasing division is 15%.
BBI has a corporate income tax rate of 35% and its debt ratio is 40%. The controller advises that BBI's levered cost of equity is 20.67%
Required -
1. Calculate the net present value of Leasing and the Equivalent Loan amount.
2. Determine whether BBI should buy or lease these machines based on your analysis.
What is the total proceeds from the bond issuance
: If the market rate on the date of issuance is 6.5%. What is the total proceeds from the bond issuance? On July 1, 2000, $300,000 face value bonds were issued.
|
What amount should be reported as unearned subscription
: Kiyak Publishing Ltd. sells magazine subscriptions for a 1-year, On December 31, 2009, what amount should be reported as unearned subscription revenue?
|
What is the restaurant prime cost percent for the week
: If the restaurant has $20,470 in sales that week, what is the restaurant's prime cost percent for the week
|
How much is the gross receipts collected
: When gross purchases during the same period amounted to ?51,498,000, how much is the gross receipts collected/collectible from its customers?
|
Calculate the net present value of leasing
: The controller advises that BBI's levered cost of equity is 20.67%. Calculate the net present value of Leasing and the Equivalent Loan amount
|
Which is the investment category for type of project
: Which is the most likely investment category for this type of project? Retailer John Sons invests $500 000 in a new computer network to streamline purchasing
|
Make the income statement using multi step approach
: Make the income statement using multi step approach. Post the journal entries to the ledger using under periodic and perpetual inventory system.
|
Describe the basis limitation on deducting losses
: Generally partnership bottom-line losses pass through to the partner and are fully deductible. Describe the basis limitation on deducting losses
|
What is the required treatment of each of the events
: What is the required treatment of each of the events in the financial statements? Carey settled and paid a claim involving prior employees alleging
|