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Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firm’s brokers. The system also permits customers to call up current quotes on terminals in the lobby. The equipment costs $1,000,000 and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a 10% interest rate. Although the equipment has a 6-year useful life, it is classified as a special-purpose computer and therefore falls into the MACRS3-yearclass. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value is $200,000. However, because real-time display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Lewis’s marginal federal-plus-state tax rate is 40%. You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions.
What is the present value cost of owning the equipment?
You have your choice of 3 investments. Investment A is a 15-year annuity that features end of month $1500 payments and has an interest rate of 5.5% compounded monthly. Investment B is a 5 percent continuously compounded lump sum investment also for 1..
If you were the CFO of a company that had to decide on hundreds of potential projects every year, would you want to use sensitivity analysis and scenario analysis or would the amount of arithmetic required take too much time and thus not be cost-effe..
If Quick Burger can earn 6 percent on its short-term investments, assuming a 365-day year, which of the options would you recommend to minimize the transfer cost?
Consider a two-period, two-state world. Let the current stock price be 45 and the risk-free rate be 5 percent. Each period the stock price can go either up by 10 percent or down by 10 percent. A call option expiring at the end of the second period ha..
The Good Life Insurance Co. wants to sell you an annuity which will pay you $600 per quarter for 30 years. You want to earn a minimum rate of return of 5.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?
A 30-year maturity bond has a 6% coupon rate, paid annually. It sells today for $877.42. A 20-year maturity bond has a 5.5% coupon rate, also paid annually. It sells today for $889.5. A bond market analyst forecasts that in five years, 25-year maturi..
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.8, 1.0, 1.5, and 1.7, respectively. the current cost of equity (based o..
Analyze the effectiveness of using a tower crane or a mobile crane for a water treatment plant project.- What are the OSHA requirements concerning the routing of concrete buckets being lifted by a crane?
Hunter's Lodge purchased $578,000 of equipment four years ago. The equipment is seven-year MACRS property. The firm is selling this equipment today for $199,500. What is the Book Value of this equipment at the time of sale?
Why do banking regulations tend to encourage financial innovation? How have money market funds, junk bonds, commercial paper, and securitization tended to reduce the profitability of traditional bank lending?
Post your comments and respond to classmates' posts for this Discussion Question: If common stockholders are the owners of the company, why do they have the last claim on assets and a residual claim on income?
Nimitz Rental Company provided the following information to its auditors. For the year ended March 31, 2011, the company had revenues of $966,851, general and administrative expenses of $377,500, depreciation expenses of $131,455, leasing expenses of..
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