Question
An equipment costs $1,000,000, the loan rate on the equipment is 10%, and the marginal tax rate is 40%. Assume that the equipment will have
An equipment costs $1,000,000, the loan rate on the equipment is 10%, and the marginal tax rate is 40%. Assume that the equipment will have 3-year MACRS life but will be used for four years (with the annual depreciation rates of 33.33% the first year, 44.5% the second year, 14.75% the third year, and 7.5% the fourth year). If the company borrows and buys, assume that it can obtain a maintenance contract at a cost of $20,000 per year. The equipment will have a residual value of $ $200,000 at the end of year 4. Assume that the firm can lease the equipment, instead of borrowing and buying it, at a cost of $250,000 per year. Please answer the following questions: 1) What is the present value of the cost of owning? 2) What is the present value of the cost of leasing? 3) Should the firm buy or lease the equipment?
A 1) -$645,656; 2) -$661,653; 3) Buy |
B | 1) -$591,793; 2) -$661,653; 3) Buy |
C | 1) -$591,793; 2) -$550,952; 3) Lease |
D | 1) -$607,696; 2) -$550,952; 3) Lease |
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