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Lear Corporation has decided to acquire a new equipment at a cost of $698,000. The equipment has an expected life of 6 years and will
- Lear Corporation has decided to acquire a new equipment at a cost of $698,000. The equipment has an expected life of 6 years and will be depreciated using 5-year MACRS with rates of .20, .32, .192, .1152, .1152, and .0576 (note that 5-year MACRS depreciation actually takes place over 6 years). There is no actual salvage value. Riverhawk Financing has offered to lease the equipment to Lear for $135,000 a year for 6 years. Lear has a cost of equity of 11.2 percent, a pre-tax cost of debt of 5.8 percent, and a marginal tax rate of 25 percent. Should Lear lease or buy?
a. Lear should lease because NPV = $18,028.72
b. Lear should lease because NPV = $21,209.58
c. Lear should buy because NPV = $15,763.87
d. Lear should buy because NPV = $10,933.18
e. Lear should lease because NPV = $10,805.47
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