1. As a financial analyst for Muffin Construction, you have been asked to recommend the method of...
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Question:
1. As a financial analyst for Muffin Construction, you have been asked to recommend the method of financing the acquisition of new equipment needed by the firm.The equipment has a useful life of 8 years.If purchased, the equipment, which costs $700,000 will be depreciated using straight line depreciation to a zero book value.If purchased, the needed funds can be borrowed at a 10% pretax annual rate.Muffin's weighted after-tax cost of capital is 12%.The actual salvage value at the end of 8 years is expected to be $50,000.Muffin's marginal tax rate is 40%.Annual, beginning of year lease payments would be $160,000.
a.Compute the Net Advantage to Leasing.
b.Should Muffin lease or own the equipment?
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