Question
Calculate the NPV of an investment with the following conditions and conclude which is better. Purchase the asset: purchasing the asset requires capital cost of
Calculate the NPV of an investment with the following conditions and conclude which is better. Purchase the asset: purchasing the asset requires capital cost of 400,000 dollars (At time zero) that can be depreciated based on MACRS 7 year life depreciation with the half year convention over eight years ( from year 0 to 7). And the salvage value will be 100,000 dollars at the end of year 7. Lease (operating lease): The asset can be leased for 7 years at annual operating lease payments (LP) of 70,000 dollars( from year 1 to year 7) The asset would yield the annual revenue of $150,000 and operating cost of $40,000 for seven years (year 1 to 7). Considering income tax of 40% and minimum ROR of 8%. Calculate ATCF and NPV for both options and conclude which is better.
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