The Lulu Bell Printing Corporation is trying to determine whether to lease or purchase a printing machine.
Question:
The Lulu Bell Printing Corporation is trying to determine whether to lease or purchase a printing machine. The management of the firm wants to determine the cash flow effects from buying rather than leasing. The following information is known: mk5
Transcribed Image Text:
Purchase printing machine. The printing machine costs $165.000. The depreciation and ITC for the printing machine is as follows: Year 1 2345 ITC = $16.500 Depreciation $23,512.50 34,485.00 32.917.50 32,917.50 32.917.50 The useful economic life of the printing machine is 5 years. The estimated salvage value of the machine after taxes is $14,000. Lease alternative. The printing machine can be leased for 5 years. The terms of the lease are that five annual lease payments of $35.000 are required with the first payment due immediately. At the end of the lease term, the Lulu Bell Printing Corporation can buy the printing machine from the lessor at its fair market value. All costs associated with the operation of the printing machine (e.g., maintenance, insurance, and property taxes) will be borne by Lulu Bell Printing Corporation. The lessor will retain the ITC. Required: a Assuming that the marginal tax rate for Lulu Bell Printing Corporation is 40%, determine the cash flow consequences from leasing. b If the pre-tax borrowing cost is 10%, should the machine be purchased or leased? "Problems marked with an asterisk are based on information in the Appendix of this chapter.
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Answer rating: 100% (QA)
Answered By
PALASH JHANWAR
I am a Chartered Accountant with AIR 45 in CA - IPCC. I am a Merit Holder ( B.Com ). The following is my educational details.
PLEASE ACCESS MY RESUME FROM THE FOLLOWING LINK: https://drive.google.com/file/d/1hYR1uch-ff6MRC_cDB07K6VqY9kQ3SFL/view?usp=sharing