XYZ Limited is looking to acquire a new equipment for its project that will last...
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XYZ Limited is looking to acquire a new equipment for its project that will last for seven years. The required rate of return of the project is 12% per annum. XYZ can borrow at 9% per annum and buy the equipment outright or lease the equipment from Moes Leasing. XYZ has evaluated the finance lease and decided to lease the equipment as the NPV for the lease versus borrow to buy has been calculated to be $15,000. The applicable corporate tax rate is 35% and the equipment is going to be fully depreciated over the seven years using a straight-line method. However, XYZ has realized that the purchase cost of the equipment used in the calculations was over-estimated by $20,000. If the correct cost of purchasing the equipment is used, XYZ should now purchase the equipment by borrowing because the NPV for the lease versus borrow to buy is now -$5,000.
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