Low gear company , an automotive specially firm is considering the acquisition of a new Differential locks
Question:
Low gear company , an automotive specially firm is considering the acquisition of a new Differential locks manufacturing machine .Low gear can purchase the machine through the use of its normal financing mix (45% debt and 55% common equity) or lease it.
Pertinent details follow :
Acquisition $155,000
Useful life 4 years
Salvage value $15,000
Depreciation method straight-line
Annual cash savings before tax and depreciation from the machine $36,000
Rate of interest 12%
Marginal tax rate 40%
Annual rentals $45,000
Annual operating expenses included in the lease $4,750
cost of capital 14%
a) evaluate whether the machine acquisition is justified through normal purchase financing assuming that the expected resale price at the end of the 4th year is $12,000
b) Should low Gear lease the asset ? (Find NAL)
Fundamentals of Cost Accounting
ISBN: 978-1259969478
6th edition
Authors: William N. Lanen, Shannon Anderson, Michael W Maher