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The Mortar Bored Company was considering whether to buy a new $100,000 reduction machine or to lease

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The Mortar Bored Company was considering whether to buy a new $100,000 reduction machine or to lease it. It was estimated that the machine would reduce variable costs by $31,000 per year and have an eight-year life with no salvage value. The machine will be depreciated on a straight-line basis, and there is no investment tax credit. The firm's optimal capital structure is 50% debt to total assets, its before-tax costs of debt and equity are 15% and 25%, respectively, and it has a 40% tax rate. If it were to lease, the fees would be $21,400 per year paid at the end of each year.
(a) What is the NPV of the project if the firm owns the project?
(b) What is the NPV of the lease to the company?
(c) Should the company lease the project? Why or why not?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
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