Bear Lake Equipment Company (BLEC) Is Considering an Expansion Which

question 98

Multiple Choice

Bear Lake Equipment Company (BLEC) is considering an expansion which will require a new machine that costs $125,000. BLEC can either lease or buy the equipment. The company's tax rate is 40% and its after tax cost of debt is 5%.
Lease: Annual payments of $26,400 made at the beginning of each year over five years. The lessor covers all maintenance, while the lessee covers insurance and other costs. The lessee has the option to purchase the machine for $31,250 paid along with the final lease payment.
Purchase: The $125,000 cost will be financed over five years with annual end of year payments of $31,580. The machine will be depreciated on the five year MACRS schedule, and the firm will pay $3,500 per year for a service contract to cover all maintenance. The company will cover all insurance and other costs.
-Refer to BLEC.What is the present value of the five years of after-tax cash flows from purchasing the machine?

• A) $92,504
• B) $108,120
• C) $77,351
• D) $123,273

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Definitions:

Pelvis

The pelvis is a bony structure located in the lower part of the torso, enclosing the pelvic cavity and comprising the pelvic bones, supporting the spinal column and anchoring the lower limbs.

Sesamoid Bones

Small, round bones typically found embedded within tendons, acting to alter the direction of muscle forces and reduce friction.

Phalanges

The bones in the fingers and toes of humans and other vertebrates.

Cuneiform

Relating to the wedge-shaped bones or in the context of ancient writing systems, specifically an early system of writing with wedge-shaped marks.