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Levi is evaluating an investment to produce a new product with an extended marketable life of 4 years. In order to produce this product, the
Levi is evaluating an investment to produce a new product with an extended marketable life of 4 years. In order to produce this product, the company will have to acquire a piece of new equipment worth $200,000. The company is considering whether it should lease or borrow to purchase the equipment. The opportunity cost of borrowing for an asset which has a purchase price of $200,000 is 8%. Other details of each altemative are provided as follows: Purchase: This equipment can be depreciated at 20% reducing balance if owned, and has an expected salvage value of $50,000 after 4 years. Lease: If the lease is in advance, there will be four payments of $45.000 made at the beginning of each year and a residual payment of $10,000 made at the end of the term. i.e., at the end of year 4. The company tax rate is 30%. Calculate the NPV of leasing and advise the company as to whether it should purchase or lease the equipment with payments made in advance
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