Shine Ltd is considering purchasing or leasing new equipment. If it purchases the equipment it will cost
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Shine Ltd is considering purchasing or leasing new equipment. If it purchases the equipment it will cost $500,000 and if it leases the equipment it will be required to pay six rentals of $115,000 each. The equipment can be depreciated over three years on a straight-line basis for tax purposes.
The residual value is expected to be zero and the tax rate is 30%. Assume that rental payments are paid at the beginning of each period. Calculate the NPV (approx.) of the lease relative to an equivalent loan. Assume the cost of debt after-tax is 10%. Assume that the tax savings on the lease payment occurs at the time the payment is made.
Cost Of DebtThe cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...
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