Freedom Ltd is considering whether to lease or buy an advanced machine for its new...
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Freedom Ltd is considering whether to lease or buy an advanced machine for its new product. The following information is available for this decision: Buy: The purchase price of the machine is $4.85 million. The machine will be depreciated using straight-line method over 4 years with a zero salvage value. Lease: The annual lease payments will be $1.1 million, payable at the beginning of each of the four years of the lease. The annual interest rate of secured debt is 11.67%. The corporate tax rate is 40%.
(a) Should the firm lease or buy the machine? Why? (Show your calculations). (13 marks)
(b) Calculate the maximum amount of lease payment that Freedom Ltd is willing to pay. (Show your calculations).
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