Jenkins Company has decided to acquire office equipment $($copiers$,$ printers, etc.$)$ that it will use at its headquarters building for the next five years. The equipment would cost $$400,000$ to purchase. Alternately, Jenkins could lease the equipment for five years, at an annual cost of $$120,000.$ The lease includes equipment maintenance, which would otherwise be anticipated to cost $$30,000$ per year.

The estimated salvage value of the equipment after five years is $$25,000.$ The five$-$year MACRS schedule applies for tax depreciation. Jenkins tax rate for both income and capital gains is $34\%.$ You can assume that, should Jenkins purchase the equipment, it will borrow $$400,000$ to do so$.$ The loan would call for Jenkins to pay $$32,000$ per year in interest $(8\%),$ and to repay the principal after at the end of year five.

 

 The appropriate discount rate for this problem is $5\mathrm{.}28\%($the after tax cost of borrowing$).$  You can also assume that Jenkins would earn this rate $($after tax$)$ on any cash balances. All cash flows except the initial purchase and borrowing are end$-$of$-$period. Finally, you can assume that Jenkins taxable income is high enough that the tax deductible expenses associated with this decision would indeed reduce the company's liability .

 

Suppose that Jensen wanted to set aside a sum of money now that would be sufficient to fund the after$-$tax costs of acquiring the assets through the borrow to purchase alternative. How much money would they need to set aside? 

 

 

Answer rating: 100% (QA)

To determine how much money Jenkins would need to set aside now to fund the aftertax costs of acquiring the assets through the borrowtopurchase altern... View the full answer