How much debt is displaced by the lease

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Reference no: EM13880553

High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments will be $66,000 for five years, due at the beginning of each year. This machine will save Farmer $16,000 per year through reductions in electricity costs. As an alternative, Farmer can purchase a more energy-efficient machine from Basic Machine Corporation (BMC) for $335,000. This machine will save $26,000 per year in electricity costs. A local bank has offered to finance the machine with a $335,000 loan. The interest rate on the loan will be 8 percent on the remaining balance and will require five annual principal payments of $67,000. Farmer has a target debt-to-asset ratio of 62 percent. Farmer is in the 30 percent tax bracket. After five years, both machines will be worthless. The machines will be depreciated on a straight-line basis.

a. What is the Net Advantage to leasing (NAL) in $?

b. How much debt is displaced by the lease? PV = _______

Reference no: EM13880553

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