1). Lease Financing vs. Purchasing
As part of its overall plant modernization and cost reduction program, the management of
Teweles Textile Mills has decided to install a new automated weaving loom. In the
capital budgeting analysis of this equipment, the IRR of the project was found to be 20
percent versus a project required return of 12 percent.
The loom has an invoice price of $250,000, including delivery and installation charges.
The funds needed could be borrowed from the bank through a four-year amortized loan at
10 percent interest rate, with payments to be made at the end of each year. In the event
that the loom is purchased, the manufacturer will contract and service it for a fee of
$20,000 per year at the end of each year. The loom will be depreciated over four years
using the straight line method, with a salvage value of $42,500. And Teweles’s tax rate is
Apilado Automation Inc., maker of the loom, has offered to lease the loom to Teweles for
$70,000 upon delivery and installation (at t=0), plus four additional lease payments of
$70,000 to be made at the ends of Years 1 through 4. The lease agreement includes
maintenance and servicing. Teweles plans to build an entirely new plant in four years, so
it has no interest in either leasing or owning the proposed loom for more than that period.
(a). Should the loom be leased or purchased? Explain and show your work.
2). Foreign Currency Valuation
Using the web site: http://www.x‐rates.com/
I would like you to find me what $100 US would represent in your currency? Also find how
this rate has changed thus far in 2013 (percentage change). What does this say about the
Use the Brazilian Real for comparison
What would be the priority of the claims as to the distribution of assets in a liquidation
under Chapter 7 of the Bankruptcy Act? 1 is the highest claim, 5 is the lowest.
(a) Trustees’ costs to administer and operate the firm.
(b) Common stockholders.
(c) General, or unsecured, creditors.
(d) Secured creditors, who have a claim to the proceeds from the sale of specific
property pledged to secure a loan.
(e) Taxes due to federal and state governments.
Brau Auto, a national autoparts chain, is considering purchasing a smaller chain, South
Georgia Parts (SGP). Brau’s analysts project that the merger will result in the following
incremental free cash flows and horizon values (in millions):
Year 1 2 3 4
Free cash flow $2 $4 $5 $10
Unlevered horizon value 107
Assume that all cash flows occur at the end of the year. SGP is currently financed
with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is
undertaken, SGP would retain its current $15 million of debt and issue enough new debt to
continue at the 30% target level. The interest rate would remain the same. SGP’s premerger
beta is 2.0, and its post‐merger tax rate would be 34%. The risk‐free rate is 8% and
the market risk premium is 4%. What is the value of SGP to Brau?