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Company ABC Inc has just sold an asset for $2.3 million for the purpose of self-financing...

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Finance

Company ABC Inc has just sold an asset for $2.3 million for thepurpose of self-financing a capital expansion program that mayinclude purchase of a piece of manufacturing equipment for $1.6million. The company’s tax rate is 25%, its required rate of returnis 11%, the estimated salvage or recovery value of the equipment atthe end of 3 years is $450,000. Given the high-tech nature of itsindustry, the conservative approach is to use a depreciable life of3 years on a straight line basis. The alternative is to lease thesame piece of equipment for $425,000 over the same period. ShouldABC lease or buy? Show your work to justify your decision orrecommendation.

Answer & Explanation Solved by verified expert
4.1 Ratings (668 Votes)
Lease alternative has higher NPV Hence lease    See Answer
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