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3 . a ) The Chirta Company produces industrial machines, which have five - year lives. Chitra is willing to either sell the machines for
a The Chirta Company produces industrial machines, which have five year lives. Chitra is willing to either sell the machines for Rs or lease them at a rental that, because of competitive factors, yields an aftertax return to Chitra of percent its cost of capital. What is the company's competitive leaserental rate? Assume straightline depreciation, zero salvage value, and an effective corporate tax rate of percent.
b The Sohan Machine Shop is contemplating the purchase of a machine exactly like those rented by Chitra. The machine will produce net benefits of Rs per year. Sohan can buy the machine for Rs or rent it from Chitra at the competitive leaserental rate. Sohan's cost of capital is percent, its cost of debt percent, and T percent. Which alternative is better for Sohan?
c If Chitra's cost of capital is percent and competition exists among lessors, solve for the new equilibrium rental rate. Will Sohan's decision be altered?
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