Question
Fexmon Corporation is a public limited firm. The firm decides to acquire a mining excavator which costs $20 million. Straight-line depreciation is applied over 10
Fexmon Corporation is a public limited firm. The firm decides to acquire a mining excavator which costs $20 million. Straight-line depreciation is applied over 10 years to zero residual value. The borrowing rate for Fexmon Corp. is 7 percent. Fexmon Corp. besides buying the mining excavator has an option of leasing from a manufacturer Mexmon Corporation. The leasing is offered for $2 million per year for seven years (starting today). The borrowing rate for Mexmon Corp. is 6.5 percent. But, Fexmon Corp. pays no tax whereas Mexmon Corp. pays tax rate at 35 percent. REQUIRED: Compute the return for both firms and determine which firm realizes more.
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