Question
After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in equipment of $6 million. The
After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in equipment of $6 million. The investment will be depreciated using MACRS and a 7 year life. When the project comes to an end in 5 years, the equipment can be sold for $1,500,000. The firm pays tax at 35% and it can obtain a 5-year bank loan at 12%. The company will buy a maintenance contract at a cost of $50,000 per year (paid at the beginning of each year). The CFO has also approached Better Leasing Corporation about leasing the equipment instead and Better Leasing Co. has offered a lease rate of $1,320,000 per year, paid at the beginning of each year.
1- (EXCEL TEMPLATE) Should Better Mousetraps lease or buy? What is the Net Advantage to Leasing?
2- (EXCEL TEMPLATE) What is the maximum lease payment that Better Mousetraps would be willing to pay?
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