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1. Company A is planning to lease a machine for the next six years for an annual lease payment of $1700 paid in advance, plus an initial fee of $500. There is a one-year delay for the tax benefits of lease payments and the initial fee. Company A may buy the machine, depreciate it fully over the next six years, and then sell it for 20% of the purchase price. Company A can borrow the money at 9% interest rate to finance the purchase, and its tax rate is 30%. Calculate the price of the machine, which will make purchasing or leasing to be equally costly.
2. Company A is interested in buying an apartment and renting it out for $12,000 a year, collecting the rent in advance each year. Company A will depreciate the apartment over 20 years, but sell it after 5 years at a price, which is 20% more than its purchase price. The maintenance expenses and real estate taxes, paid at the end of each year, are $2000 annually. The after tax cost of capital for Company A is 10%, and its income tax rate is 25%. Find the price of the apartment that Company A should pay so that it can make $10,000 in current dollars from this project.
3. Company A is looking into the possibility of buying several coin-operated soda machines and placing them in the local malls. Each machine costs $3200, which she will depreciate on a straight-line basis over 10 years. The machine will dispense Pepsi cans at $1.50 each and Pepsi Company will replenish them at 65 cents each. Each machine is expected to sell 450 cans a month. The malls will provide the space and electricity for the machines for $325 a month at the end of every month. The tax rate of Company A is 30% and the after-tax cost of capital 15%. Assume that the income and bills occur at the end of each month, but Company A pays the taxes annually. Should Company A get into this venture?
4. Company A is planning to open a store at the local mall, paying $2500 rent, in advance each month. Company A will buy $25,000 in costume jewelry as the initial inventory and buy the display cases for $4000. Company A expects that the average sales per month will be $15,000, of which Company A will use $5000 to replenish its inventory. Company A will hire a manager for $2000 a month. At the end of five years, Company A plans to sell the entire business, including inventory and display cases, for $30,000. Company A's income tax rate is 25% and it will use a discount rate of 12%. Assume that all the cash flows occur at the end of the month, except rent, and the taxes are due at the end of the year. Ignore depreciation and capital gains. Is it a worthwhile project?