Jet Dry Inc

question 4

Essay

Jet Dry Inc. is undergoing a sale/leaseback arrangement on a piece of its excavating equipment. The equipment is a class 38 (30%) asset, with a fair market value of $250,000 (which is lower than the original cost). The equipment currently generates $75,000 in annual pre-tax revenue. Jet Dry Inc. will sell the equipment at FMV.
Under the leasing terms, the lease agreement will be for five years, with no residual value at the end of the term. The annual leasing cost will be $55,000 per year.
The UCC relating to this piece of equipment is $150,000. Other assets will remain in the asset pool, and there is sufficient UCC in the class that recapture will not occur as a result of the sale.
The company is subject to a corporate tax rate of 27% and achieves a 12% after-tax rate of return.
Required:
Calculate the net present value of the cash flow that will result from this sale-and-leaseback arrangement. (Round all numbers to zero decimal places.)

---

Definitions:

Transfer Prices

Prices charged for the selling of goods and services between subsidiaries or divisions within the same company.

Variable Cost

Expenses that change in proportion to the level of production or business activity.

Negotiation

A strategic discussion that resolves an issue in a way that both parties find acceptable, often used in business to finalize deals, terms, and prices.

Investment Turnover

A metric assessing how effectively a firm turns asset investments into revenue.