Question
The Rubber Manufacturing Company is considering the purchase of a new machine for $30,000+($500xA) (with A: the last digit of your student ID). The machine
The Rubber Manufacturing Company is considering the purchase of a new machine for $30,000+($500xA) (with A: the last digit of your student ID). The machine is expected to save the firm $12,500 per year in operating costs over a 5-year period, and can be depreciated on a straight-line basis to a zero salvage value over its life. Alternatively, the firm can lease the machine for $6,400 per year for 5 years, with the first payment due in 1 year. The firm's tax rate is 35% and the before-tax cost of debt is 10%.
a. Calculate the NPV of leasing instead of buying decision. Should the company lease or buy?
b. Calculate the maximum lease payment that the company can pay.
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