Leasing Problems Fal 2015

1) Carrion Luggage, Inc. needs to decide whether to buy or lease a new machine. The purchase price of the machine is $50,000, and it would be depreciated straight-line to zero over the next 4 years, at which time the machine would be worthless. As an alternative, you could lease the machine by paying $15,000 per year over the next 4 years. If Carrions corporate tax rate is 30% and its cost of secured debt is 12% p.a., should it lease or buy the machine?

2) Heavee Metal, Inc. is considering leasing a computer system that costs $1 million. The lease requires annual payments of $135,000 for 10 years, starting one year from now. Heavee has a 35% tax rate. If the company purchases the computer system, it could depreciate it straight-line down to zero over 10 years. Heavee cost of secured debt is 10%. Calculate the net advantage to leasing for Heavee.

PS: Must show work. If attachment it must be Microsoft ONLY or in pdf. No office/publisher attachments please. Thanks