Your firm is considering leasing an emachine. The lease lasts for three years and calls for four

Question:

Your firm is considering leasing an emachine.® The lease lasts for three years and calls for four payments of $100 per year with the first payment due immediately. The emachine would cost $360 to buy and would be depreciated using straight-line depreciation over three years to a of zero. The actual is expected to be $100 after three years. The market wide borrowing rate is 10 percent for loans on assets such as this, and your firm’s marginal tax rate is 25 percent. Should your firm lease or buy the emachine?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...