R Construction needs a piece of equipment that costs $200 million. R can either lease the equipment or borrow $300 million from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that R's tax rate is 30% and that the equipment's depreciation would be $100 million per year. If the company leased the asset on a 3-year lease, the payment would be $110 million at the beginning of each year. If R borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 3 years and will be discarded. Should R lease or buy the equipment?
R Construction needs a piece of equipment that costs $200 million. R can either lease the equipment or borrow $300 million from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that R's tax rate is 30% and that the equipment's depreciation would be $100 million per year. If the company leased the asset on a 3-year lease, the payment would be $110 million at the beginning of each year. If R borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 3 years and will be discarded. Should R lease or buy the equipment?
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:R Construction needs a piece of equipment that costs $200 million. R can either lease the
equipment or borrow $300 million from a local bank and buy the equipment. If the equipment is
leased, the lease would not have to be capitalized. Assume that R's tax rate is 30% and that the
equipment's depreciation would be $100 million per year. If the company leased the asset on a
3-year lease, the payment would be $110 million at the beginning of each year. If R borrowed
and bought, the bank would charge 10% interest on the loan. In either case, the equipment is
worth nothing after 3 years and will be discarded. Should R lease or buy the equipment?
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