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Jane is the financial manager for Alpha Corporation. She has been asked to perform a lease-versus-purchase...

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Finance

Jane is the financial manager for Alpha Corporation. She hasbeen asked to perform a lease-versus-purchase analysis on a newprinting machine.

The machine costs $360,000 and will be depreciated using thestraightline method with zero residual value over five years.Alternatively, the company

can lease the machine with year-end payments of $95,000 overfive years. The company’s tax rate is 35% and its before-tax costof borrowing is 10%.

Required:


a Given the above information, calculate the net advantage toleasing (NAL) for Alpha Corporation to obtain the new printingmachine,

assuming the company will use its own reserves rather thanborrowing from the bank. Which option would you recommend?Explain.

b Suppose only $300,000 purchase price of the machine isborrowed from ABC Bank. Should Alpha Corporation change its buy orlease decision

on the printing machine? Discuss.

Answer & Explanation Solved by verified expert
3.9 Ratings (501 Votes)
Present Value Cash Flow1iN idiscount rate after tax cost of borrowing 101035 0065 NYear of cash flow a ANALYSIS OF PURCHASE ALTERNATIVE Annual Depreciation 72000 3600005 Depreciation tax shield 25200 7200035 N Year 0 1 2 3 4 5 CF Cash Flow 360000 25200 25200 25200    See Answer
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