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National Hydropower Company (NHC) needs a drilling machine for construction novning of a tunnel. One alternative is to lease the machine on a 4-year guideline
National Hydropower Company (NHC) needs a drilling machine for construction novning of a tunnel. One alternative is to lease the machine on a 4-year guideline contract for a lease payment of Rs 50,000 per year, with payments to be made at the end of each year. Alternatively, NHC could purchase the machine outright for Rs 200,000, financing the purchase by a bank loan for the net purchase price and amortizing the loan over a 4-year period at an interest rate of 12 percent per year. The machine falls into the MACRS 3-year property class. It has a residual value of Rs 20,000, which is the expected market value after 4 years, when NHC plans to replace the machine irrespective of whether it leases or buys. NHC has a marginal corporate tax of 35 percent. What is NHC's PV cost of leasing? a. b. What is NHC's PV cost of owning? Should the machine be leased or purchased? C. What are the advantages of leasing over purchasing
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