Question 6

Use the following information for Problems 49 Sodheimer, Inc, is evaluating whether it should lease or purchase a machine for continued Sodheimer, The is cvachine costs a total of $860,000, including shipping and installation and falls 0.1481 , and 0.0741 .) If bought, the machine would be used for four years and then sold at the end of the fourth year for $50,000. To finance the equipment, the corporation would obtain a 4-year simple interest loun, interest payable at the end of each year, at a before-tax cost of 9%. In addition. a maintenance contract on the equipment would cost $20,000 per year, payable at the beginning of each year. The maintenance expenses are tax deductible. Altematively, the firm could lease the equipment for four years for a lease payment of $240,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. 6. What is the present value of the cost of owning the equipment? a. $737,212.75 b. $694,033.16 c. $618,437,21 d. $584,302.63