Reynolds Corporation plans to purchase equipment at a cost of $5 million. The company's tax-rate is 21%, the equipment's depreciation would be $1,000,000 per year for 5 years, and no salvage value is expected. If the company leased the asset on a 5-year lease, the payment would be $1,100,000 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge 10 percent interest on the loan.

a. Calculate the cost of purchasing the equipment with debt.

Purchase Option
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b. Calculate the cost of leasing the equipment.

c. Calculate NAL? Should the company buy or lease the equipment? Why?

Expert Answer

a) Calculate the cost of Purchasing the e…View the full answer

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