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Low gear company , an automative specially firm is considering the acquisition of a new Differential locks manufacturing machine .Low gear can purhcase the machine

Low gear company , an automative specially firm is considering the acquisition of a new Differential locks manufacturing machine .Low gear can purhcase the machine through the use of its normal finaning mix (45% debt and 55% common equity) or lease it.

Pertinent details follow :

Acquisition $155,000

Useful life 4 years

Salvage value $15,000

Depreciation method straight-line

Annual cash savings before tax and depreciation from the machine $36,000

Rate of interest 12%

Marginal tax rate 40%

Annual rentals $45,000

Annual operating expenses included in the lease $4,750

cost of capital 14%

a) evaluate whether the machine acquisition is justified through normal purchase financing assuming that the expected resale price at the end of the 4th year is $12,000

b) Should low Gear lease the asset ? (Find NAL)


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