Western Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires BEGINNING of year payment of S16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5- year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. QUESTIONS| a) Determine the after-cash outflow for Western Trucking under each alternative. b) Find the present value the after- tax cash outflow for each alternative using the ater tax cost of debt. c) Which alternative-lease or purchase would you recommend? Justify.
Western Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows. Lease: The leasing arrangement requires BEGINNING of year payment of S16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment. Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5- year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years. QUESTIONS| a) Determine the after-cash outflow for Western Trucking under each alternative. b) Find the present value the after- tax cash outflow for each alternative using the ater tax cost of debt. c) Which alternative-lease or purchase would you recommend? Justify.
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 9P
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 7 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT