# FIN 401 Lecture Notes - Kumquat, Net Present Value

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### Related Questions

Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%.

(Note: MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)

Question: What is the principal repayment in Year 2?

a. | $33,233 | |

b. | $0 | |

c. | $6,979 | |

d. | $10,000 |

Question: What is the after-tax interest payment in Year 3?

a. | $8,000 | |

b. | $2,924 | |

c. | $3,656 | |

d. | $6,000 |

Question: How much is the after-tax salvage value at the end of Year 3 if Carmichael Cleaners buys the machine?

a. | $20,964 | |

b. | $24,000 | |

c. | $30,000 | |

d. | $25,482 |

Question: Should Carmichael Cleaners buy or lease the machine?

a. | Buy, the net advantage to leasing is $5,734 | |

b. | Lease, the net advantage to leasing is $5,734 | |

c. | Buy, the net advantage to leasing is $4,822 | |

d. | Lease, the net advantage to leasing is $4,822 |