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Joshua Ltd must choose between leasing or buying an indispensable machine. The machine costs $80,000 and will be depreciated straight-line to zero over 10 years.

Joshua Ltd must choose between leasing or buying an indispensable machine. The machine costs $80,000 and will be depreciated straight-line to zero over 10 years. Joshua Ltds tax rate is 25 percent, and the firm can borrow at 6 percent.

Tree Leasing Company has offered to lease the machine to Joshua Ltd for payments of $10,000 at the start of each year. (Assume that tax is paid at the same time as expenditures are made.) But Tree Leasing Ltd also requires a security deposit of $1,000 to be paid at the start of the lease, refundable at the end. Tree Leasing Ltds tax rate is 40% and it can borrow at 4 percent.

Required:

(a) What is the Net Advantage to Leasing for Joshua Ltd?

  1. (b) What is the maximum lease payment Joshua Ltd would be prepared to make each year if Joshua were to lease? [Note that the values of inputs needed in Part (b) are substantially unchanged from what you have already calculated for use in Part (a)]

    (2 marks)

  2. (c) What is the minimum yearly pretax lease payment the Tree Leasing Company would accept? (3 marks)

  3. (d) Will the lease contract be signed on the basis of your findings in parts (b) and (c)? Provide a brief reason for your decision

    (1 mark)

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