ABC Limited is looking to acquire a new equipment for its project that will last for...

 

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ABC Limited is looking to acquire a new equipment for its project that will last for five years. The required rate of return of the project is 10% per annum. ABC can borrow at 9% per annum and buy the equipment outright or lease the equipment from Moe's Leasing. ABC has evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease is calculated to be -$10,000. However, the purchase cost of the equipment was under-estimated by $12,000. The applicable corporate tax rate is 30% and the equipment is going to be fully depreciated over the five years using a straight-line method. How will ABC's decision be affected by the inclusion of the additional purchase price of $12,000? ABC Limited is looking to acquire a new equipment for its project that will last for five years. The required rate of return of the project is 10% per annum. ABC can borrow at 9% per annum and buy the equipment outright or lease the equipment from Moe's Leasing. ABC has evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease is calculated to be -$10,000. However, the purchase cost of the equipment was under-estimated by $12,000. The applicable corporate tax rate is 30% and the equipment is going to be fully depreciated over the five years using a straight-line method. How will ABC's decision be affected by the inclusion of the additional purchase price of $12,000?

Answer rating: 100% (QA)

The additional purchase price of 12000 will increase the initial outlay for ABC Limited This will i... View the full answer