You want a new automobile for personal use. Neither depreciation nor interest payments will be tax deductible. You can buy the automobile with a $2,000 down payment and a 9 percent, forty-eight month loan. The monthly payments will be $665. Alternately, you can lease the automobile with; a $2000 NON –refundable deposit, a $1600 refundable security deposit and lease payments of $617 at the beginning of each month for 48 months. Using a 9 percent annual required return to evaluate the salvage value, what must the car be worth at the end of 48 months for the purchase to be more attractive than the lease? What is the indifference point?
T Corporation is considering the acquisition of M Corporation. M Corporation generates earnings before interest and tax of $2.75 million a year, and asset replacement cost approximately equals depreciation. Alternative minimum tax is not an issue, there are no synergistic benefits, and cash flows are expected to continue forever and are not expected to grow in the future. Assuming a 25 percent tax rate and a 8 percent after-tax required return, what is net cash flow? Assuming year-end cash flows, what is the value of M Corporation’s capital? If M Corporation has long-term debt of $3 million, what is the value of the equity of M Corporation?