Potential Answers :
A.
| 1) -$645,656; 2) -$661,653; 3) Buy |
B.
| 1) -$591,793; 2) -$661,653; 3) Buy |
C. | 1) -$591,793; 2) -$550,952; 3) Lease |
D.
| 1) -$607,696; 2) -$550,952; 3) Lease |
An equipment costs $1,000,000, the loan rate on the equipment is10%, and the marginal tax rate is 40%. Assume that the equipmentwill have 3-year MACRS life but will be used for four years (withthe annual depreciation rates of 33.33% the first year, 44.5% thesecond year, 14.75% the third year, and 7.5% the fourth year). Ifthe company borrows and buys, assume that it can obtain amaintenance contract at a cost of $20,000 per year. The equipmentwill have a residual value of $ $200,000 at the end of year 4.Assume that the firm can lease the equipment, instead of borrowingand buying it, at a cost of $250,000 per year. Please answer thefollowing questions: 1) What is the present value of the cost ofowning? 2) What is the present value of the cost of leasing? 3)Should the firm buy or lease the equipment?
