A firm needs a machine to conduct it’s operations. The firm can buy or lease to machine. If purchased, the cost of the machine is $150,000 and cost $1,000 per year in maintenance. The machine has an economic life of 15 years and is depreciated in the straight line method. The machine will have a salvage value of $10,000 at the end of it’s life. Alternatively the firm can lease the machine for $15,000 per year, in which case it will not incur any further cost for operating the machine. The firm can borrow at an annual pre-tax interest rate of 9% and the firm’s WACC is 16%. The tax rate is 33%. What is the net advantage of leasing? (Give  explanation)

Answer rating: 100% (QA)

SOLUTION To determine the net advantage of leasing we need to compare the costs of purchasing and operating the machine with the costs of leasing the ... View the full answer