ASF wishes to acquire a 100,000 multifacet cutting machine the machine has a useful life of eight years, after which there is no expected salvage value. If ASF were to finance the cutting machine by signing an eight-year lease contract, annual lease payments of $16,000 would be required. The company could also finance the purchase of the machine with a 12 percent term loan having a payment schedule of the same general configuration as the lease payment schedule. The asset falls in the five-year property class for cost recovery (depreciation) purposes, and the company has a 35 percent tax rate. What is the present value of cash outflows for each of these alternatives, using the after-tax cost of debt as the discount rate? Which alternative is preferred?

ASF wishes to acquire a 100,000 multifacet cutting machine the machine has a useful life of eight years, after which there is no expected salvage value. If ASF were to finance the cutting machine by signing an eight-year lease contract, annual lease payments of $16,000 would be required. The company could also finance the purchase of the machine with a 12 percent term loan having a payment schedule of the same general configuration as the lease payment schedule. The asset falls in the five-year property class for cost recovery (depreciation) purposes, and the company has a 35 percent tax rate. What is the present value of cash outflows for each of these alternatives, using the after-tax cost of debt as the discount rate? Which alternative is preferred?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 2P

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