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A cash-strapped firm would like to acquire a capital asset touse for the next fifteen years. It can purchase the asset, whichcosts $50M, by taking out a fifteen-year balloon loan at 5.8%annual interest rate. The firm plans to sell the asset at bookvalue for $15M at the end of the fifteen-year period.Alternatively, the firm can lease the asset from themanufacturer for $4.75M a year. It is agreed, after negotiating,that the lessor would be responsible for maintaining the asset.Annual maintenance cost for the asset is $500K, in year-end value.The firm uses the straight-line depreciation method and pays a 30%income tax. Should the firm lease or buy the asset?Please show all work.
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