Reference no: EM13197933

1. Ukraine Corporation needs 125 desktop computers, which it can buy for $1800 each. Ukraine will depreciate the computers uniformly over their useful life of 5 years. An investment tax credit of 5% is also available, and the computers will have no residual value. Ukraine plans to borrow the money at an interest rate of 10% specifically to finance the purchase. The tax rate of Ukraine is 32%. Turkey Leasing Corporation can also lease the same computers to Ukraine for the same period. Calculate the total annual lease payments for all computers, made in advance each year, and their tax benefit taken right away, that will make Ukraine indifferent to leasing or buying.

2. Spain Corporation is planning to lease a machine for the next five years for an annual lease payment of $1500 paid in advance, plus an initial fee of $600. There is a one-year delay for the tax benefits of lease payments and the initial fee. Spain may buy the machine, depreciate it fully over the next five years, and then sell it for 15% of the purchase price. Spain can borrow the money at 8% interest rate to finance the purchase, and its tax rate is 30%. Calculate the price of the machine, which will make purchasing or leasing to be equally costly.

3. Sweden Inc is planning to lease a computer for $6927.22 per annum, payable in advance, for a period of 4 years. The lease will cover maintenance expenses. Sweden chairman feels that if he buys the same computer he should be able to sell it at 40% of the purchase price after 4 years. However, in case of purchase, the company must pay annual maintenance expenses of $1200 at the end of each year. The pretax cost of debt of Sweden is 8% and its income tax rate is 30%. If Sweden buys the computer, it will depreciate it fully in four years. What is the maximum price that Sweden should pay for this computer? Assume that Sweden can take the tax credit for lease payments a year later.

4. Romania Trucking Service would like to acquire 300 vans for its business. It can buy each van for $36,000, depreciate it completely over 6 years, and then sell it for $12,000. The tax rate of Romania is 33%, and its cost of debt is 10%. Portugal Rental Company will lease these vans to Romania for a period of 6 years at the annual rate of $5900, paid in advance. Romania will get the tax benefits of the lease at the end of each year. Should Romania buy or lease these vans?

5. Kathy Ireland is planning to buy a house for $150,000 by borrowing money at the rate of 9%. She expects to rent the house for 5 years, collecting $12,000 annual rent in advance each year. She thinks that she can sell the house for $175,000 after five years. Ireland has income tax rate of 25%. She will have to pay $3,000 annually in maintenance and real estate taxes, and she will depreciate the house on a straight-line basis for 20 years. The risk-adjusted discount rate in this project is 12%. If all the expenses are fully deductible, and all gains are taxable, should she undertake this project?

6. Georgia Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. It will depreciate the house over 25 years, but sell it after 14 years at twice its purchase price. The maintenance expenses and real estate taxes, at the end of each year, are $3000 annually. The after tax cost of capital for Georgia is 12% and its income tax rate 30%. Find the price of the house that Georgia should pay so that it can just break even in this project.

7. Leila Denmark is looking into the possibility of buying several coin-operated vending machines and placing them in the local hospitals. Each machine costs $2500, which she will depreciate on a straight-line basis over 10 years. The machine will dispense Coke cans at $1 each and Coca Cola Company will replenish them at 45 cents each. Each machine is expected to sell 600 cans a month. The hospitals will provide the space and electricity for the machines for $300 a month at the end of every month. The tax rate of Leila Denmark is 25% and the after-tax cost of capital 12%. Assume that the income and bills occur at the end of each month, but she pays the taxes annually. Should Leila Denmark get into this venture?

8. Belgium Car Rental plans to start its business by buying 10 cars at the average price of $17,000 each, depreciating them completely over 6 years using the straight-line method. It will rent space in a parking lot for $200 a month, paying the rent in advance each month. Belgium expects that it will rent six cars on an average day, charging $45 per day per car. The maintenance expense for each car is $50 a month. After 6 years, Belgium will sell the cars at 30% of the original value. Belgium receives all the income and pays all the bills, (except rent) at the end of each month, but it pays the taxes once a year. Its income tax rate is 30% and it will use 15% as the discount rate. Assume that there are 30 days in a month. Is it a worthwhile project for Belgium?