Company X is looking to acquire a new equipment for a project that will last for...

 

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Company X is looking to acquire a new equipment for a project that will last for eight years. The after-tax required rate of return of the project is 12% per annum. Company X can borrow at a before-tax interest rate of 10% per annum and buy the equipment outright or lease the equipment from ABC's Leasing. The applicable corporate tax rate is 28% and the equipment will be fully depreciated to zero over the eight years using a straight-line method. Company X evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease versus borrow-to-buy analysis was estimated to be -$10,000. However, subsequently Company X realised that in the analysis the purchase cost of the equipment had been under-estimated by $20,000, and also the salvage value of the equipment (at the end of the lease term) had been under-estimated by $7,000. Given the correct purchase price and salvage value, which of the following statements now accurately describes Company X's decision regarding the acquisition of this equipment? Company X is looking to acquire a new equipment for a project that will last for eight years. The after-tax required rate of return of the project is 12% per annum. Company X can borrow at a before-tax interest rate of 10% per annum and buy the equipment outright or lease the equipment from ABC's Leasing. The applicable corporate tax rate is 28% and the equipment will be fully depreciated to zero over the eight years using a straight-line method. Company X evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease versus borrow-to-buy analysis was estimated to be -$10,000. However, subsequently Company X realised that in the analysis the purchase cost of the equipment had been under-estimated by $20,000, and also the salvage value of the equipment (at the end of the lease term) had been under-estimated by $7,000. Given the correct purchase price and salvage value, which of the following statements now accurately describes Company X's decision regarding the acquisition of this equipment?

Answer rating: 100% (QA)

Based on the revised information Company X should now lease the equipment from A... View the full answer