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Beta Industry has decided to acquire a piece of equipment and use it over the next 4 years. The equipment costs $60,000, inclusive of delivery
Beta Industry has decided to acquire a piece of equipment and use it over the next 4 years. The equipment costs $60,000, inclusive of delivery and installation charges. Option 1: The company can use a loan to finance the purchase, which will be amortized annually for 4 years with annual interest rate of 12%. By purchasing the equipment, the company will also need to arrange annual maintenance package with $2,000 payable at the end of each year. The company uses a straight line depreciation to fully depreciate the equipment over the 4 years, and the salvage value is zero after the 4 years. Option 2: The company may also choose to lease the equipment with annual cost of $15,000. The lessor with be responsible for maintenance in this case and there will be no additional servicing costs. Given that the effective tax rate is 40%. Use the net present value method to determine whether the company should finance the purchase by a loan or by a lease. (10 marks)
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