Reference no: EM133002519

Supper LLC decided it would acquire a new machine on January 1, 2020. This would be the organization's first machine. The total cost of the machine is $485,000 which represents its market value. Visconti expects the useful life of the machine will be six years. Moreover, Visconti expects that the annual contribution of the machine to the revenue generating process of the organization would be constant across those periods.

Visconti was considering two options for acquiring the machine. Option 1 is to borrow the entire purchase price from their bank, which is offering a six-year loan with an annual rate of interest of 12% compounded monthly[1] with fixed blended payments (i.e., combined interest and principal reduction) to be made on a monthly basis beginning on January 31, 2020. Under this arrangement, Visconti would expect that the disposal value of the machine at the end of its useful life would be $99,500.

Option 2 is leasing the machine from the manufacturer. The rate of interest on the lease is also 12% per annum compounded monthly. The residual value specified for the machine at the end of the lease is $99,500. Visconti would have the option to acquire the machine at the end of the lease for the residual value. The lease term is 72 months, and the lease payments would begin on January 31, 2020. Visconti would be responsible for all maintenance and insurance for the leased asset.

Required:

Problem (I) Determine the fixed blended monthly payment that would be required if the machine is bought with a loan through the bank.

Problem (II) Prepare Table 1 in your response describing the following on a month-by-month basis for the entire useful life of the machine if Visconti borrows the money from the bank to purchase the machine as described above (assume the asset is disposed of for $99,500 at the end of its useful life):

a. The opening and closing values of any liabilities related to the purchase and use of the machine,
b. The cash flow to service the loan,
c. The relevant expenses (itemized, not totaled) that are recognized under financial accounting related to the purchase and use of this machine.

Problem (III) Determine the fixed monthly lease payment that would be required if the machine is leased from the manufacturer.

Problem (IV) Prepare Table 2 in your response describing the following on a month-by-month basis for the entire useful life of the machine if Visconti leases the machine as described above (assume the asset is returned to the lessor at the end of the lease):

a. The opening and closing values of any liabilities related to the lease and use of the machine,
b. The cash flow to service the lease,
c. The relevant expenses (itemized, not totaled) that are recognized under financial accounting related to the lease and use of this machine.