Calculate the present value of each cash outflow stream

Reference no: EM131290310

GMS Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40 percent tax bracket, and its after tax cost of debt is currently 6 percent. The terms of the lease and the purchase are as follows: Lease. Annual beginning-of-year lease payments of $93,500 are required over the three-year life of the lease. The lessor will pay all maintenance costs; the lessee will pay insurance and other costs. The lessee will exercise its option to purchase the asset for $25,000 paid along with the final lease payment. Purchase. The $250,000 cost of the research equipment can be financed entirely with a 10 percent loan requiring annual end-of-year payments of $100,529 for three years. The firm in this case will depreciate the equipment under MACRS using a three-year recovery period. (See Table 9.1 for applicable MACRS percentages.) The firm will pay $9,500 per year for a service contract that covers all maintenance costs; the firm will pay insurance and other costs. The firm plans to keep the equipment and use it beyond its three-year recovery period.

a. Calculate the after-tax cash outflows associated with each alternative.

b. Calculate the present value of each cash outflow stream using the after-tax cost of debt.

c. Which alternative, lease or purchase, would you recommend? Why?

Reference no: EM131290310

Questions Cloud

Write a short summary about the aircraft mantenance : write a short summary describing how the website you chose relates to the learning objective and why it will be a valuable resource for them in the future.

Efforts of brazil government : 1. Do you think the efforts of Brazil's government to keep the economy growing will be successful? Why or why not? 2. What downsides might Brazil experience by implementing quotas, tariffs, and measures to devalue its currency?

How has long-term debt changed over this period : Since these exercises depend upon real-time data, your answers will change continuously depending upon when you access the Internet to download your data.

How much did sam borrow : Sam has a loan that requires a single payment of $4,000 at the end of 3 years. The loan's interest rate is 6%, compounded semiannually. How much did Sam borrow?

Calculate the present value of each cash outflow stream : The firm in this case will depreciate the equipment under MACRS using a three-year recovery period. (See Table 9.1 for applicable MACRS percentages.) The firm will pay $9,500 per year for a service contract that covers all maintenance costs; the f..

Who has the authority to sign off on each inspection : Describe the primary flight controls, their movement about each axis, and location.Explain the formation of the wing airfoil normal shock wave during high-speed flight.

Marketing research essay question : What's the answer to this Marketing Research essay question, "Starbucks is wanting to introduce a new coffee taste. Need to formulate Hypothesis 0 and alternative; type I and II error and decide which one is more important."

Determine the annual loan payment : The terms of the loan require equal end-of-year payments for the next eight years. Determine the annual loan payment, and break it into the amount of interest and the amount of principal paid for each year

What are the maintenance details of this issue : What are the maintenance details of this issue?What is the impact on the airline and how should a manager address this issue?

User Account

All Pages