Question
Company ABC Inc has just sold an asset for $2.3 million for the purpose of self-financing a capital expansion program that may include purchase of
Company ABC Inc has just sold an asset for $2.3 million for the purpose of self-financing a capital expansion program that may include purchase of a piece of manufacturing equipment for $1.6 million. The company's tax rate is 25%, its required rate of return is 11%, the estimated salvage or recovery value of the equipment at the end of 3 years is $450,000. Given the high-tech nature of its industry, the conservative approach is to use a depreciable life of 3 years on a straight line basis. The alternative is to lease the same piece of equipment for $425,000 over the same period. Should ABC lease or buy? Show your work to justify your decision or recommendation.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started