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5. INVESTMENT DECISION. You must install $1 million of new machinery in your plant. You can obtain a bank loan for 100% of the required
5. INVESTMENT DECISION. You must install $1 million of new machinery in your plant. You can obtain a bank loan for 100% of the required amount. Alternatively, you lease the machinery. The following facts apply: The equipment falls into the 3-year MACRS class Estimated maintenance expenses are $50,000 per year . Your tax rate is 34% The bank loan will be paid in three equal installments at the end of each year. The interest rate on the loan is 14% . The lease call for payments of $320,000 at the end of each year for three years. The lessee pays insurance, property taxes and maintenance. If you lease, you believe you will need to acquire the machinery at the end of the lease at its fair market value. Your best guess is that the fair market value will be $200,000. Obviously, it could be a higher or lower. What should you do? Why
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