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Test Information Description A manager has decided to buy a widget. Two alternative financing methods are available: (A) use a financial lease or (B) purchase
Test Information Description A manager has decided to buy a widget. Two alternative financing methods are available: (A) use a financial lease or (B) purchase the widget using owner financing and borrowed capital. The financial lease is a 3 year lease with annual lease payments of S6,500 paid at the beginning of each year (a lease payment is tax deductible; assume it can be claimed at the beginning of each year). The manager can buy the widget for S20,000 and sell it again in 3 years for $5,000, Abank will loan S15,000 and the loan will be fully amortized at 10% over 3 years with annual payments. The IRS will allow the widget to be depreciated over 10 years. The marginal tax rate is 15%. The manager requires at least a 10% pre-tax returm on capital. Assume that the inflation rate is 0%. Should the manager buy or lease
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