HNH Corporation is evaluating a new project with an expected life of 4 years. The project requires an investment in a new plant. HNH can either borrow the money to buy the plant or lease the plant from its manufacturer. The details of each alternative are shown as follows: Purchase: The purchase price of the plant is $800,000 and is expected to have a salvage value of $50,000 after 4 years. The plant qualifies for 25% reducing balance depreciation if owned. Lease: The lease involves four annual payments in arears of $150,000 payable at the end of each year, and a residual payment of $30,000 payable at the end of the lease term, i.e., at the end of year 4. The company tax rate is 30%. The borrowing rate is 8% per annum. Calculate the NPV of leasing and advise the company as to whether it should purchase or lease the plant.
HNH Corporation is evaluating a new project with an expected life of 4 years. The project requires an investment in a new plant. HNH can either borrow the money to buy the plant or lease the plant from its manufacturer. The details of each alternative are shown as follows:
Purchase:
The purchase price of the plant is $800,000 and is expected to have a salvage value of $50,000 after 4 years. The plant qualifies for 25% reducing balance
Lease:
The lease involves four annual payments in arears of $150,000 payable at the end of each year, and a residual payment of $30,000 payable at the end of the lease term, i.e., at the end of year 4.
The company tax rate is 30%. The borrowing rate is 8% per annum. Calculate the
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
