Question
Union Pacific Corporation (UNP) needs a piece of equipment that costs $250. UNP can either lease the equipment or borrow $250 from a local bank
Union Pacific Corporation (UNP) needs a piece of equipment that costs $250. UNP can either lease the equipment or borrow $250 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that UNP's tax rate is 30% and that the equipment's depreciation would be $125 per year. If the company leased the asset on a 2-year lease, the payment would be $137.5 at the beginning of each year. If UNP borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded.
a. What is the cost of owning, if UNP buys the equipment? Round your answer to two decimal places.
-$
b. What is the cost of leasing, if UNP leases the equipment? Round your answer to two decimal places.
-$
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started