Bavarian Brew Lease
Bavarian Brew wants to lease a new bottling machine. The company obtains a 10 year lease requiring annual payments of $15,000 at the beginning of the year. The firm is expected to exercise its option to purchase the machine at the termination of the lease for $10,000 at the end of year 10. The company is in the 35% tax bracket.

-Bavarian Brew has also the option to purchase the machine.If the present value of the cash flows associated with the purchase is $78,000,what is the net present value of the lease option? Assume that the company's cost of debt is 7%.

Question

Bavarian Brew Lease
Bavarian Brew wants to lease a new bottling machine. The company obtains a 10 year lease requiring annual payments of $15,000 at the beginning of the year. The firm is expected to exercise its option to purchase the machine at the termination of the lease for $10,000 at the end of year 10. The company is in the 35% tax bracket.

-Bavarian Brew has also the option to purchase the machine.If the present value of the cash flows associated with the purchase is $78,000,what is the net present value of the lease option? Assume that the company's cost of debt is 7%.

Quizplus · Accepted Answer

after tax cost of debt: .07(1-.35)= .0455
NPV of lease = PV of 10 payments of 9750 made at the beginning of the year + PV of purchase price at the end of year 10 = 80461 + 6409 = 86870
NPV = 86870-78000 = 8870

Bavarian Brew Lease Bavarian Brew Wants to Lease a New Bottling Machine. the Bottling