A company can either purchase or lease a $200,000 machine with a useful life of 8...

 

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A company can either purchase or lease a $200,000 machine with a useful life of 8 years. The machine could be fully depreciated on a straight-line basis over its useful life, at the end of which it would have no salvage value. The lease would involve 8 annual installments of $30,000, each due at the end of the year. The company's pre-tax cost of debt is 10% and the tax rate is 20%. What is the expected increase in the firm's debt capacity if it chooses to buy instead of lease? A company can either purchase or lease a $200,000 machine with a useful life of 8 years. The machine could be fully depreciated on a straight-line basis over its useful life, at the end of which it would have no salvage value. The lease would involve 8 annual installments of $30,000, each due at the end of the year. The company's pre-tax cost of debt is 10% and the tax rate is 20%. What is the expected increase in the firm's debt capacity if it chooses to buy instead of lease?

Answer rating: 100% (QA)

To compare the financial impact of buying versus leasing the machine we need to calculate the presen... View the full answer