Big Sky Mining Company must install $1.5 million of new machinery in its' Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. The lease would qualify as a guidline lease for tax purposes. Also, assume no maintenance charges. Assume that the following facts apply:
Please complete the question.
In order to make a decision between obtaining a bank loan or leasing the machinery, we need to consider the financial implications of both options. To do this, we need the following facts:
1. Cost of the machinery: The cost of the new machinery is mentioned as $1.5 million. This is the amount that needs to be financed or paid through leasing.
2. Bank loan: The company has the option to obtain a bank loan for 100% of the purchase price. This means that the bank will finance the entire cost of the machinery.
3. Lease: The company also has the option to lease the machinery. It is mentioned that the lease would qualify as a guideline lease for tax purposes. This implies that the lease agreement satisfies certain criteria set by the tax authorities, allowing the company to receive tax benefits associated with leasing.
Based on these facts, let's analyze the implications of both options:
Bank Loan:
If the company chooses to obtain a bank loan, it will borrow the entire $1.5 million needed to purchase the machinery. The company will be required to repay the loan over a specific period of time, typically with interest. The interest rate and the terms of the loan are not mentioned, so we cannot determine the exact financial implications at this point.
Lease:
If the company chooses to lease the machinery, it will enter into a lease agreement with a lessor who owns the machinery. The lease agreement will specify the lease term and the lease payments that the company needs to make. Since it is mentioned that the lease qualifies as a guideline lease for tax purposes, the company may be eligible for certain tax benefits associated with leasing. However, the specific tax benefits depend on the tax regulations of the jurisdiction where the company operates, which are not mentioned.
To make an informed decision between a bank loan and a lease, the company needs to consider factors such as the interest rate on the loan, the lease terms and payments, the tax benefits of leasing, and its own financial situation and goals. A financial analysis should be conducted to compare the total cost and cash flow implications of both options over the expected life of the machinery. This analysis can help the company determine the most suitable option for acquiring the new machinery.