Super Sonics Entertainment is considering buying a machine that
costs $435,000. The machine will be depreciated...
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Super Sonics Entertainment is considering buying a machine thatcosts $435,000. The machine will be depreciated over five years bythe straight-line method and will be worthless at that time. Thecompany can lease the machine with year-end payments of $107,500.The company can issue bonds at a 9 percent interest rate. If thecorporate tax rate is 35 percent, should the company buy orlease?
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Company should lease the machine Step1Calculation of present value of cash flow under leasing option Year After tax lease rental Lost depreciation tax shield Cash flow Discount
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