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SBS Inc. is planning to install a new machinery in its factory. SBS Inc plans to use the machine for only 5 years. SBS Inc
SBS Inc. is planning to install a new machinery in its factory. SBS Inc plans to use the machine for only 5 years. SBS Inc can either purchase the machine financed 100% with a bank loan or lease the machine. Assume tax rate of 40% and that the following facts apply: Lease The firm will lease the machine for 5 years. The lease terms call for beginning-of-year payments of $6,000 per year, with the first payment payable at the start of the lease. All maintenance cost will be paid by the lessor. The lessor will own the lease at the expiration of the lease. . Purchase The machine costs $24,000. The firm can finance 100% of the purchase price of the machine with a 9% per annum (annual compounding), 5-year bank loan requiring end-of-year installment payments of $6,170. The machine will be depreciated on a straight-line basis to zero over 6 years (ignore salvage value when computing annual depreciation). The firm will maintain the machine at a cost of $1,500 per year, payable at year-end. The machine will be sold at an estimated salvage value of $10,000 at the end of Year 5. . Use the method learnt in the course and answer the following questions. (a) Calculate the appropriate discount rate that SBS should use when evaluating whether to lease or purchase the machine. (2 marks) (b) What is SBS's PV cost of leasing? (3 marks) (c) What is SBS's PV cost of owning? Should the machine be leased or purchased
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