User Account

All Pages

What is the net present value of the net tax shield on CCA

Assignment Help Financial Accounting
Reference no: EM133001360

Question - Minute Recreational Airline (MRA) has decided to acquire a 45-seat regional jet from an airplane manufacturer. The jet has an initial purchase price of $15 million. Company management now needs to determine whether it should buy or lease the jet.

If MRA purchases the jet, the Federal government has offered a one-time subsidy of $500,000, to be applied to the purchase price of the jet. The company would finance the purchase with a $15 million bank loan at an interest rate of 12% and 10 years to maturity. MRA would incur costs associated with maintenance and insurance of $300,000 per year.

If MRA acquires the jet by leasing from the airplane manufacturer, it would have to pay lease payments of $2.5 million per year over 10 years, with the lease payments being payable in advance. MRA would receive the tax shield on the lease payment at the end of the year the lease payment is made. For the duration of the jet's lease, the manufacturer would pay the maintenance and insurance costs.

The salvage value of the jet after 10 years is expected to be $1 million. MRA has a corporate tax rate of 35%. The WACC for the airplane purchase is 10%. Assume the CCA rate is 25%.

Note: Don't forget the minus sign for the negative cash flows!

1. What is the PV of the lease payments?

2. What is the NPV of the lease option?

3. What is the PV of after-tax operating costs?

4. What is the present value of the salvage value?

5. What is the net present value of the net tax shield on CCA?

6. What is the NPV of the borrow to purchase option?

Reference no: EM133001360

Questions Cloud

Comment on the assertion : Comment on the assertion that "strategic planning is a never-ending process that develops basic business objectives and establishes
Why do you think the Tata Nano strategy failed : What are the key differences in the strategic approach of the Tata Nano as compared with CitizenM Hotels? Why do you think the Tata Nano strategy failed
Explain what work is being done with the spreadsheets : Explain what work is being done with spreadsheets of financial data. Give specific examples for this client. How is this type of work relevant to all stages
What is the approximate internal rate of return : A $25,000 investment today promises to return $10,000 per year for the next 3 years. What is the approximate internal rate of return (IRR) on this investment
What is the net present value of the net tax shield on CCA : The salvage value of jet after 10 years is expected to be $1 million. MRA has a corporate tax rate of 35%. What is net present value of net tax shield on CCA
Defining adjusting entries : Defining adjusting entries? What are the differences between accrual basis and cash basis accounting? Why adjusting entries are need
Estimate the cost of manufacturing overhead : For a month in which 7,000 direct labour hours went into producing guitars, estimate the cost of manufacturing overhead
Calculate purchasing power of this amount : Your client has $7,936,000 now. Calculate purchasing power of this amount in 12 years from now. The average rate of inflation is 3.92 percent
Determine which option is better for AllOils Limited : The company uses the straight line method for depreciation. Assume a tax rate of 30%. Determine which option is better for AllOils Limited showing all workings

Reviews

Write a Review

Financial Accounting Questions & Answers

  Computing the total budgeted cost

If Fields operated at 41,000 activity hours, its total budgeted cost would be:

  What is the difference between solvent and solute

1. What is the difference between solvent and solute? Please give examples

  What is amount of cost of goods manufactured for period

The beginning and ending finished goods inventories of a company were $91,000 and $94,000 respectively. If cost of goods sold equaled $800,000, what is the amount of cost of goods manufactured for this period?

  Which statements about zero coupon bonds is not true

Which statements about zero coupon bonds is NOT true? Which of the following factors influence the reinvestment risk associated with a bond?

  Summarize the concept of time value as it relates to money

If a company wishes to purchase new equipment, it must have capital. Summarize the concept of time value as it relates to money

  Prepare the statement of financial position of winter ltd

Prepare the statement of financial position of Winter Ltd for the year ended 30 June 2017 in accordance with AASB 101

  What is the stock required rate of return according to capm

What is the stock's required rate of return according to CAPM? What would happen to the required return and to market price per share if the beta were 3.80?

  Discuss the importance of maintaining independence

Discuss the importance of maintaining independence. Independence has always been a fundamental aspect of the accountancy profession.

  Cost of goods sold

The company uses the first in, first out method on a periodic basis. Physical counts are conducted at the end of the year to determine the quantity and value of merchandise inventory on hand and cost of goods sold.

  Calculate the revised gross profit and profit for the year

Calculate the revised gross profit and profit for the year figures after the correction of the errors. At the year-end of T Down & Co, an imbalance in the trial

  Keeping the current plan and adopting the new plan

Consider study problem 2-48, the racetrack problem, and its current plan - contribution margin of $2.70 per customer and total fixed costs of $1,080,000. Management is considering a new plan for next year that would increase both the admission price ..

  What was total liabilities

Based on the trial balance, what was total liabilities? S. Adams, Capital 58,000 Insurance Expense 2,200.S. Adams, Capital 58,000 Insurance Expense 2,200

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd