Question
4. The lessee's lease analysis Consider the case of Hack Wellington Co. (HWC): Hack Wellington Co. (HWC) is considering the purchase of new manufacturing equipment
4. The lessee's lease analysis Consider the case of Hack Wellington Co. (HWC): Hack Wellington Co. (HWC) is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). HWC can take out a 4-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions:
Note: Hack Wellington Co. (HWC) is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: (Note: Round the annual loan payment value to two decimal places and all other values to the nearest dollar.)
Thus, the net present value (NPV) cost of owning the asset will be: 1. $27,854 2. -$22,520 3. -$23,020 4. $19,787 Hack Wellington Co. (HWC) has been offered an operating lease on the same equipment. The four-year lease requires end-of-year payments of $1,400, and the firm will have the option to buy the asset in four years for $7,700. The firm will want to use the equipment longer than four years, so it plans to exercise this option. All maintenance will be provided by the lessor. What is the NPV cost of leasing the asset? (Note: Round your answer to the nearest dollar.) 1.-$11,626 2. $32,714 3. -$9,301 4. -$2,286 Should HWC lease or buy the equipment? Lease Buy |
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