Star Inc has completed a detailed analysis of a proposed investment in new machinery and has determined that the asset is worth  acquiring. Star is now considering the financing alternatives for the new machinery. The machinery can be laser or buy and borrow.

 If Star purchases the machinery, it will fund the purchase with a 4 year bank interest only loans of about $100,000, with an interest rate of 8%. At the end of the4 years, the machinery is expected to be sold for $20,000, though this amount is uncertain. Star will incur pretax costs associated with maintaining the machinery of $2500, incurred at the end of each year. The company uses a straight line depreciation method for tax purposes

 If instead, Star leases the machinery, it will be required to pay $30,000 per year for 4 years to be paid at the beginning of each year. The tax shelf due to the lease payments, however, occurs at the be dog each year. Under the lease agreement, maintenance is provided by the lessor at no addiction cost to Star, Star has a 45% tax rate, and the weighted average cost of capital is 12%.

 

Determine whether Star inc should lease or borrow to buy the machine. Show all your calculations

One reason why Star inc enter into lease arrangement did cheaper financing. Briefly explain why it can influence a firms decision to lease an asset rather than borrow and purchase it. 

Answer rating: 100% (QA)

Lease vs Buy Analysis for Star Inc Lease Option Annual lease payments 30000 per year paid at the beginning of each year Tax benefit Full deduction of ... View the full answer