Your boss askes you to analyze a buy lease decision regarding some new equipment for your...

 

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Your boss askes you to analyze a buy lease decision regarding some new equipment for your firm. You are given the following information: The new machinery will cost $2,200,000. You can get a loan for 100% of the value of the loan and would pay interest only at a rate of 5.75% with a balloon payment at the end of the three years for the remaining balance. Purchasing the equipment will require annual maintenance costs of $250,000 a year (paid at the end of each year). The machine will depreciate under 3 yr MACRS. You expect to sell the machine for $325,000 at the end of three years. The firms tax rate is 40%. Alternatively you could lease the machine for $1,000,000 a year, and all maintenance costs would be covered by the lessor. The equipment will be returned to the lessor the end of 3 years. (MACRS 1 Yr 33% 2 Yr 45% 3 Yr 15 % 4 Yr 7%) Your boss askes you to analyze a buy lease decision regarding some new equipment for your firm. You are given the following information: The new machinery will cost $2,200,000. You can get a loan for 100% of the value of the loan and would pay interest only at a rate of 5.75% with a balloon payment at the end of the three years for the remaining balance. Purchasing the equipment will require annual maintenance costs of $250,000 a year (paid at the end of each year). The machine will depreciate under 3 yr MACRS. You expect to sell the machine for $325,000 at the end of three years. The firms tax rate is 40%. Alternatively you could lease the machine for $1,000,000 a year, and all maintenance costs would be covered by the lessor. The equipment will be returned to the lessor the end of 3 years. (MACRS 1 Yr 33% 2 Yr 45% 3 Yr 15 % 4 Yr 7%)

Answer rating: 100% (QA)

To analyze the buylease decision for the new equipment we need to compare the costs and benefits of purchasing and leasing options Lets calculate the ... View the full answer