Question
Stargate Warping wishes to acquire a $180,000 equipment which it plans to use for ten years. At the end of this time, the machines residual
Stargate Warping wishes to acquire a $180,000 equipment which it plans to use for ten years. At the end of this time, the machines residual value would be $20,000. For tax purpose, the asset has to be fully depreciated over a six-year period using the straight-line method. The company can use either a true lease or debt financing. Lease payments of 28,000 at the beginning of each of the ten years would be required. If debt financed, the interest rate will be 14 percent, and debt payments would be at the end of each of the ten years. The company is in a 42% tax bracket. Which method of financing has the lower present value of cash outflows? [10 Marks]
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