Use the information below to answer the following three ques…
Use the information below to answer the following three questions (on NPV of owning, NPV of leasing and NAL). Big Sky Mining Company must install $2.2 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: The machinery falls into the MACRS 3-year class. The yearly MACRS allowance factors are as follows: 0.3333 (Year 1), 0.4445 (Year 2), 0.1481 (Year 3), 0.0741 (Year 4). Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. The firm’s tax rate is 30%. The loan would have an interest rate of 12%. It would be non-amortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4. The lease terms call for $600,000 payments at the end of each of the next 4 years. Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $400,000 at the end of the 4th year.
Read DetailsWhat is the NPV of owning? (Round your answer to TWO decimal…
What is the NPV of owning? (Round your answer to TWO decimal places and if the value is NEGATIVE, enter a negative sign.) You will get credit based on correctly computing: The after-tax loan payments for each year. (5 points) The depreciation tax savings for each year. (5 points) The residual value and tax on residual in the *correct* year. (2 points) The yearly net cash flows (years 0 to 4). (3 points) The NPV with the correct discount rate. (3 points) This means that you should CLEARLY show your work for each of these inputs (they should be labeled so that I don’t have to search for them).
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