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 $1.8 million. The companys tax rate is 20%, its required rate of return is 9%, the estimated salvage or recovery value of the equipment at the end of 3 years is $550,000. 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 $600,000/year over the same period. Should ABC lease or buy? Show your work to justify your decision or recommendation.
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