Free cash flow consequences of buying

Reference no: EM13760413

1. Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000 per year for 7 years. Craxton's tax rate is 35%. (Assume the fabricator has no residual value at the end of the 7 years.)

a. What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease?

b. What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease?

c. What are the incremental free cash flows of leasing versus buying?

2. Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over 5 years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for 5 years.

Assume Riverton's borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease.

a. If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?

b. Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent loan?

c. What is the effective after-tax lease borrowing rate? How does this compare to Riverton's actual after-tax borrowing rate?

Reference no: EM13760413

Questions Cloud

Discuss the authors life as it relates to the novel : Describe the biographical context that influenced the work of American authors. Discuss the author's life as it relates to the novel.

Effects of the alternative actions : Prepare a tabular summary of the effects of the alternative actions on the components of stockholders' equity, outstanding shares, and book value per share.

Journal entry to record the issuance of the bonds : Prepare the journal entry to record the issuance of the bonds. Prepare the adjusting entry to record the accrual of interest on December 31, 2011

What does ngugis story of waiyakis failed struggle : What does Ngugi's story of Waiyaki's failed struggle to unite the ridges tell us about the obstacles to achieving freedom in a society that has experienced colonial rule?

Free cash flow consequences of buying : What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease? What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease?

Mycobacterium and other bacteria : Which of the following stains is used frequently to identify Mycobacterium and other bacteria whose cell walls contain high amounts of lipids.

Compare and contrast the two critical approaches : Compare and/or contrast the two critical approaches. How are they different and similar? Determine which critical approach you find most useful for examining the conflicts and meaning in literature.

Difference in reported operating income : State whether operating income is higher under variable or absorption costing and the amount of the difference in reported operating income under the two methods. Treat each condition as an independent case.

Break-even sales volume and dollars : What is the break-even sales volume and dollars for each nut?

User Account

All Pages