Question
ABC Limited is looking to acquire a new equipment for its project that will last for five years. The required rate of return of the
ABC Limited is looking to acquire a new equipment for its project that will last for five years. The required rate of return of the project is 10% per annum. ABC can borrow at 9% per annum and buy the equipment outright or lease the equipment from Moes Leasing. ABC has evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease is calculated to be -$10,000. However, the purchase cost of the equipment was under-estimated by $12,000. The applicable corporate tax rate is 30% and the equipment is going to be fully depreciated over the five years using a straight-line method. How will ABCs decision be affected by the inclusion of the additional purchase |
price of $12,000? (A) The equipment should be leased since the NPV of lease is now $952. (B) The equipment should still be purchased by borrowing since the NPV of lease is now - $1,008. (C) The equipment should still be purchased by borrowing since the NPV of lease is now - $952. (D) It is now indifferent between lease and borrow-to-buy. (E) The equipment should be leased since the additional cost saved is higher than the negative NPV calculated, i.e., NPV of lease is now $2,000. |
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