Reference no: EM132479311
Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply.
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34:Yr 1 2 3 4
35 Rate 33.33% 44.45% 14.81% 7.41%
36 Dep Exp 499,950 666,750 222,150 111,150
37 Dep tax say 124,988 166,688 55,538 27,788
38
39 2a) Find amortized loan payments. Annual Loan balance
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(5525,398.03)
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40 Year 0
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1
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2
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3
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4
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414Total loan payment
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(5525,398.03)
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(5525,398.03)
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($525,398.03)
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(5525,398.03)
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42
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Interest payment
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225,000
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179,940.30
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128,121.64
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68,530.18
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43
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Principal payment
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300,398.03
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345,457.73
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397,276.39
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456,867.85
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44
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After-tax interest
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168,750
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134,955
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96,091
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51,398
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45
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Loan balance 1,500,000
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1,199,602
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854,144
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456,868
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46
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47
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3) Depreciation
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48
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Dep Rate
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33.33%
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44.45%
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14.81%
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7.41%
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49
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Dep Exp
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499,950
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666,750
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222,150
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111,150
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50
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Start book value
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1,500,000
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1,000,050
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333,300
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111,150
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51
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Remaining book value
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1,000,050
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333,300
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111,150
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52
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Residual fair market value
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25000
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53
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54
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4) Find the cost of ownership (Brigham et al, 2020, P. 787)
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55
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0
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1
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2
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3
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4
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56
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Maintenance cost
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0
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0
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0
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0
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57 New machinery cost (1,500,000)
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58 Loan amount 1,500,000
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59 After-tax maintenance cost
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-
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60 After-tax interest payment
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(168,750)
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(134,955)
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(96,091)
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(51,398)
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61 Tax savings from depr
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124,987.50
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166,687.50
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55,537.50
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27,787.50
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62 Prindpal repayment
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(300,398.03)
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(345,457.73)
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(397,276.39)
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(456,867.85)
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63 Net Cash Flow
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(344,161)
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(313,725)
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(437,830)
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(480,478)
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64 PV Ownership [aftertax cost of debt (1,194,496)
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(1) The machinery falls into the MACRS 3-year class.
(2) Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.
(3) The firm's tax rate is 25%.
(4) The loan would have an interest rate of 15%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4.
(5) The lease terms call for $400,000 payments at the end of each of the next 4 years.
(6) Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4th year.
Question a. What is the cost of owning?
Question b. What is the cost of leasing?
Question c. What is the NAL of the lease?