Problem 1: The financial manager of Time Press Inc. is considering installing a printing machine for $400,000. The machine will be depreciated using straight line method with zero residual value over a period of 4 years. Alternatively, the firm can lease the printing machine with an annual lease payment of $132,000 over 4 years. The corporate tax rate is 40%. Assume the firm can borrow at 10% before taxes.
i) Should the firm buy or lease the printing machine? support your answer with computations
ii) Determine the maximum annual lease payment that the firm will pay to rent the printing machine.
iii) During the board meeting, the CFO made the following statement: "If the tax advantages of leasing were eliminated, leasing would disappear. " How would you respond? Explain.
Problem 2: Explain whether you agree with the following claim from the chief executive officer during the board meeting: 'It is a good suggestion to have a reverse split if we wish to raise the share price of the firm.