Riverbend Telephone Company
The Riverbend Telephone Company is experiencing growth and had previously tried outsourcing some of its installation work to handle the overflow above its capacity. This was unsatisfactory, and so to accommodate the new customers, RTC needs to obtain a new maintenance truck and crew. It is considering whether leasing or buying the new truck necessary to their operations is the preferable method of investment.
Question 1& 2
Without considering financing the purchase through debt, the cash costs for buying the truck for years 0- 4 are:
The cash costs for leasing the truck are:
The cash flows discounted by the risk-free rate of 9% allows us to compare the present values. This comparison illustrates a net advantage to buying the truck:
There are not many advantages to leasing the vehicle, since Reliable does not cover the cost of maintenance or registration and taxes. They only cover the cost of tires, a minimal expense, which does not offset the cost advantages of buying the vehicle. The company does not seem concerned with their debt ratios or the threat of default. The main advantage to buying the vehicle, aside from the better price is the depreciation tax shield, which subtracts annual $1800 from the costs of ownership. There are tax advantages to leasing, as the lease payments are a tax deductible expense, but that tax savings amounts to $2,880/ year.
However, this calculation is incomplete because the company needs to take on debt to finance the purchase of the car. These payments add an additional expense and cash outflow but purchasing still remains a more attractive option. The cost of the lease is still greater than the cost of debt.
The NAL still favors buying over leasing by $1216. The only other consideration would be that lease may raise the earnings on asset ratio above 12%. But since the PV of the lease payments is greater than 90% of the FMV (assuming the purchase prices is FMV), then it would be considered a capital lease and the asset would go on the Balance Sheet. Therefore there are no earning over asset ratio advantages to leasing.
Case Question 2
Using MACRS, the tax benefit realized in the early years, still does not significantly affect the NAL. Overall the tax benefits at the end of the five years are still equal.
Case Question 3
If the truck is leased, how should Mr. Freeman report investment and annual income for the RTC to the state public service commission?
According to the ASC 718-20-55-94: If modifications happen after the awards have become fully vested, the additional compensation costs should be recognized on modification dates.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
o The remaining $125,000 up front charge would not be owed until ICEDELIGHTS provided one acceptable location and the lease was signed
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
Vehicle depreciation also varies with a purchase or a lease. If someone is buying, the tax deduction will equal the full depreciation of assets per the I.R.S. schedule. If leasing it is optional to buy out the lease at the end of the term, rather than go by the I.R.S. schedule. With buying, the finance period can extend beyond the warranty period, unless warranty options are added. In contrast, with leasing, the warranty will last for the full term of the finance period no matter what.
Mr. George Dodge, Clarkson Lumber Company is doing well but there is the issue of whether or not there is too high a risk in granting the request for the $750,000 line of credit. There are many supporting strong points but it also has some problems to work out. This is a company that has many good characteristics and looks promising but needs the extra money to pay off loans, inventory, and supplies. I recommend this company to receive the line of credit.
a. The cost of debt is the money company has to pay for using the funds. In our case, annual cost of debt is kd: kd/2 = r = 5.0%. kd/2 = (47.5 + [1000-891] / 30) / ((2*891 + 1000) / 3) = 5.5% We have to multiply t...
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
damaged credit, the companies are taking a financial risk by financing them. Considering that for
The estimated free cash flows for the two strategies are $391 million for the growth strategy and $365 million for the maintain strategy. (Please refer to the excel sheet for breakdown of calculation).
Signode Industries Inc. - Providing Packaging Solutions Executive Summary SIGNODE INDUSTRY: DILEMMA AT HAND: Mr. Gary Reed, President of Signode Industries packaging division, is in a dilemma as what he should be his course of action to meet the 6.8% increase in price of cold rolled steel- the raw material used in manufacture of Signode’s primary product, steel strapping. There are few options given in the case: Increase Signode’s strapping prices to offset the increased price of cold – rolled steel. Maintain Signode’s current book prices as increasing prices would affect sales force morale. Introduce price-flex model as proposed by Jack Davis i.e. a kind of selective discounting or premium charging for customized services. Recommendations Reason: (All data in accordance to 1983) In accordance to Exhibit 1: Sales of Packaging Division of the company = $285,950 In accordance to Table A: Sales of Apex = 33.3% of $285,950 Sales of BBM = 26.8% of $285,950 Sales of HDM = 33.4% of $285,950 Sales of Customized Products = 6.5% of $285,950 In accordance to Exhibit 4: Similarly, For Apex: As it has a capacity utilization of 71% now, Suppose a sale is $100. Then contribution is $39.15 Therefore variable cost is $60.85. Now if we increase the capacity utilization to 100%, Sales becomes $ 141 since production increases by [(100-71)/71] * 100 = 41% Variable Cost = 141% of 60.85 = $85.8 Fixed Cost = 69.38% * 12.3 = $8.53 Total Cost = 85.8+8.53 = $94.33 EBIT = Sales – Variable cost – Fixed Cost = $46.67 % of EBIT = [(46.67/141) * 100] = 33.09% Suppose the company sales 100x units, the total cost was 69.38. Thus per unit cost was .6938. Now the company sells 141x units, the total cost...
In addition, from their financial statements, it appears that they made substantial property purchases in 1995 ($126,000). These were financed them with their revolving loan. One can assume that this expense was a result of their significant increase in sales, but it is generally not a good cash management strategy to use short-term debt to buy long terms assets.
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task.
Some fixed costs are depreciation, interest, insurance, & fees. Some variable costs are gasoline, tires, and maintenance on the vehicle. “The largest fixed expense associated with a new automobile is depreciation, the loss in the vehicle’s value due to time and use”(Kapoor, Dlabay & Hughes, 2012). An automobile purchases price might be cheap but when factoring in the fixed and variable cost the automobile could possibly cost more than expected. Websites like Intellichoice.com can help research and compare vehicle costs. This website shows the shopper how much it cost to own the vehicle for 5 years. When researching a vehicle to purchase it is important to consider these costs in order to make a good
Other costs include insurance, road tax, MOT and servicing which all add up over the course of a year and should not be forgotten when choosing a car, generally the more powerful the car is the more expensive the running costs tend to