Judgo Corporation is attempting to determine whether it should lease or purchase equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows: Lease there will be annual end-of-year lease payments of $25,200 each year over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will be able to exercise its option to purchase the asset for $5,000 at termination of the lease. I Purchase The equipment which costs $60,000 can be financed completely with a 14% loan that requires annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-year recovery period. (33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period. 4 Calculate the after-tax cash outflows associated with the lease and the after-tax cost associated with the purchase.
Judgo Corporation is attempting to determine whether it should lease or purchase equipment. The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows: Lease there will be annual end-of-year lease payments of $25,200 each year over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will be able to exercise its option to purchase the asset for $5,000 at termination of the lease. I Purchase The equipment which costs $60,000 can be financed completely with a 14% loan that requires annual end-of-year payments of $25,844 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-year recovery period. (33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period. 4 Calculate the after-tax cash outflows associated with the lease and the after-tax cost associated with the purchase.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Judgo Corporation is attempting to determine whether it should lease or purchase equipment.
The firm is in the 40% tax bracket, and its after-tax cost of debt is currently 8%. The terms
of the lease and of the purchase are as follows: I
Lease there will be annual end-of-year lease payments of $25,200 each year over the 3-year life
of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will
be borne by the lessee. The lessee will be able to exercise its option to purchase the asset for
$5,000 at termination of the lease. I
Purchase The equipment which costs $60,000 can be financed completely with a 14% loan
that requires annual end-of-year payments of $25,844 for 3 years. The firm in this case will
depreciate the equipment under MACRS using a 3-year recovery period. (33% in year 1, 45%
in year 2 and 15% in year 3). The firm will pay $1,800 per year for a service contract that
covers all maintenance costs; insurance and other costs will be borne by the firm. The firm
plans to keep the equipment and use it beyond its 3-year recovery period. I
Calculate the after-tax cash outflows associated with the lease and the after-tax cost associated
with the purchase.“
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