Question

Biztech Co. consider acquiring big data facilities and supercomputers with the cost of $ 125,000. The big data facilities can be either leased or purchased. Biztech Co. will acquire bigdata and supercomputers by using the most efficient way.
Alibaba Co. is in the 35% tax bracket, and after-tax cost of debt is 10%.

The terms of the lease and purchase plans for bigdata facilities and supercomputers are as follows:
Lease
• The leasing arrangement requires end-of-year payments of BD 25,000 over 4 years.
• All other costs will be paid by the lessor.
• The lessee will exercise its option to purchase the asset for BD 15,000 at termination of the lease.​

Purchase
• If Biztech purchases the bigdata and supercomputers, its cost of BD 125,000 will be financed with a 5-year, 15% p.a loan requiring equal end-of-year payments of BD 25,000.
• The bigdata and supercomputers will be depreciated using straight line depreciation towards zero salvage value.
• Biztech will pay BD 4,000 per year for a service contract that covers all maintenance and other costs. The firm plans to keep the bigdata facilities and use it beyond its 5-year recovery period.

a) Determine the after-tax cash outflows under lease alternative
b) Determine the after-tax cash outflows under lease alternative at year 5
c) Determine amount of interest paid (year 1-5) under purchase alternative
d) Determine the after-tax cash outflows under purchase alternative.
e) Find the PV of lease alternative, using the after-tax cost of debt as discount rate
f) Find the PV of purchase alternative, using the after-tax cost of debt as discount rate
g) Which alternative would you recommend to Biztech Co.? Why?

Answer 1

Answer:

$Biztech Co. consider acquiring big data facilities and supercomputers with the cost of 125,000. The big data facilities can be either leased or purchased. Biztech Co. will acquire bigdata and supercomputers by using the most efficient way.</p><p>Alibaba Co. is in the 35% tax bracket, and after-tax cost of debt is 10%.</p><p></p><p>The terms of the lease and purchase plans for bigdata facilities and supercomputers are as follows:</p><p>Lease</p><p>• The leasing arrangement requires end-of-year payments of BD 25,000 over 4 years.</p><p>• All other costs will be paid by the lessor.</p><p>• The lessee will exercise its option to purchase the asset for BD 15,000 at termination of the lease.</p><p></p><p>Purchase</p><p>• If Biztech purchases the bigdata and supercomputers, its cost of BD 125,000 will be financed with a 5-year, 15% p.a loan requiring equal end-of-year payments of BD 25,000.</p><p>• The bigdata and supercomputers will be depreciated using straight line depreciation towards zero salvage value.</p><p>• Biztech will pay BD 4,000 per year for a service contract that covers all maintenance and other costs. The firm plans to keep the bigdata facilities and use it beyond its 5-year recovery period.</p><p></p><p>a) Determine the after-tax cash outflows under lease alternative </p><p>b) Determine the after-tax cash outflows under lease alternative at year 5 </p><p>c) Determine amount of interest paid (year 1-5) under purchase alternative </p><p>d) Determine the after-tax cash outflows under purchase alternative. </p><p>e) Find the PV of lease alternative, using the after-tax cost of debt as discount rate </p><p>f) Find the PV of purchase alternative, using the after-tax cost of debt as discount rate </p><p>g) Which alternative would you recommend to Biztech Co.? Why?$

Explanation:

Biztech Co. consider acquiring big data facilities and supercomputers with the cost of $ 125,000. The big data facilities can be either leased or purchased. Biztech Co. will acquire bigdata and supercomputers by using the most efficient way.

Alibaba Co. is in the 35% tax bracket, and after-tax cost of debt is 10%.

The terms of the lease and purchase plans for bigdata facilities and supercomputers are as follows:

Lease

• The leasing arrangement requires end-of-year payments of BD 25,000 over 4 years.

• All other costs will be paid by the lessor.

• The lessee will exercise its option to purchase the asset for BD 15,000 at termination of the lease.

Purchase

• If Biztech purchases the bigdata and supercomputers, its cost of BD 125,000 will be financed with a 5-year, 15% p.a loan requiring equal end-of-year payments of BD 25,000.

• The bigdata and supercomputers will be depreciated using straight line depreciation towards zero salvage value.

• Biztech will pay BD 4,000 per year for a service contract that covers all maintenance and other costs. The firm plans to keep the bigdata facilities and use it beyond its 5-year recovery period.

a) Determine the after-tax cash outflows under lease alternative

b) Determine the after-tax cash outflows under lease alternative at year 5

c) Determine amount of interest paid (year 1-5) under purchase alternative

d) Determine the after-tax cash outflows under purchase alternative.

e) Find the PV of lease alternative, using the after-tax cost of debt as discount rate

f) Find the PV of purchase alternative, using the after-tax cost of debt as discount rate

g) Which alternative would you recommend to Biztech Co.? Why?