Suppose New Era Caps is considering purchasing a machine to attach the brims at the end of
Question:
Suppose New Era Caps is considering purchasing a machine to attach the brims at the end of its baseball caps. The machine would cost $12 million and would be depreciated over a 15 year useful life. Maintenance expenses will be $400,000 per year, payable at the end of the year. Cole’s Crazy Cook Caps (4C) approaches New Era about leasing this machine from New Era. The lease would be for 10 years. It’s expected the machine could be sold for $3,000,000 after the lease expires. New Era can borrow at 8% and has a 25% tax rate. 4C can borrow at 11% and has a 20% tax rate. The lease payment would not include maintenance expenses and would be due at the beginning of the year.
Find the maximum acceptable lease payment 4C would be willing to pay.
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ