Acme Packing Company is evaluating whether its new equipment should be purchased for $491,699 or leased for $125,805 for 5 years with payments made at the beginning of each year. If purchased, the asset would be depreciated as a 3-year asset (33.33%, 44.45%, 14.81%, and 7.41) %) and have an expected after-tax salvage value at the end of the fifth year of $100,000. Owning the equipment would increase its operating costs by $45,806 per year. The firm pays 6.2% on its debt, has a WACC of 12%, and faces a tax rate of 40%. All of the operating costs including depreciation as well as the associated tax benefits are assumed to occur evenly throughout the year (use the mid-year approximation). What is the total cost of purchasing and owning the asset (in present value terms)? Although the net cost will represent a cash outflow, present your answer as a positive number.

Answer rating: 100% (QA)

To calculate the total cost of purchasing and owning the asset we need to consider the following fac... View the full answer