DEVRY FIN 516 Week 5 Homework

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DEVRY FIN 516 Week 5 Homework

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• FIN 516 Week 5 Homework
• Problem 25-6 on Purchase Versus Lease Based on
  Chapter 25
• 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.
  Craxtons 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?
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• Problem 25-7 on Purchase Versus Lease Based on
  Chapter 25

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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 Rivertons 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 Rivertons actual after-tax
borrowing rate?