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4.) Lease or Buy. Your company wants to purchase a new network file server for its wide-area computer network. The server costs $75,000. It will be completely obsolete in three years. Your options are to borrow the money at 10 percent or to lease the machine. If you lease, the payments will be $27,000 per year, payable at the end of each of the next three years. If you buy the server, you can depreciate it straight-line to zero over three years. The tax is 34 percent. Should you lease or buy?
5.) Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of this year will be $5,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5 percent.
a. If the discount rate for this project is 10 percent, what is the project NPV?
b. What is the project IRR?
6.) Find the WACC of William Tell Computers. The total book value of the firm's equity is $10 million; book value per share is $20. The stock sells for a price of $30 per share, and the cost of equity is 15 percent. The firm's bonds have a par value of $5 million and sell at a price of 110 percent of par. The yield to maturity on the bonds is 9 percent, and the firm's tax rate is 40 percent.
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Solution Summary
The solution has 3 questions relating to lease or buy, calculation of NPV and IRR and calculation of WACC
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4. Buy or Lease
We need to find the Present Value of both the options to make a decision. The attached file has the calculation details
In buy, the initial investment is 75,000 and we get depreciation tax shield in each of the three years. The NPV of this option comes to ($53,861.76)
In lease, the rental are tax deductible and we need to find the PV of the after tax rental. This comes to ($44,315.70)
Since the lease option has a lower outgo, the ...
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