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Mattel, Inc. has decided to acquire a new equipment at a cost of $760,000. The equipment...

Mattel, Inc. has decided to acquire a new equipment at a cost of $760,000. The equipment has an expected life of 6 years and will be depreciated using 5-year MACRS with rates of .20, .32, .192, .1152, .1152, and .0576 (note that 5-year MACRS depreciation actually takes place over 6 years). There is no actual salvage value. Mass Financing has offered to lease the equipment to Mattel for $148,000 a year for 6 years. Mattel has a cost of equity of 10.8 percent, a pre-tax cost of debt of 6.5 percent, and a marginal tax rate of 25 percent. Should Mattel lease or buy? Mattel should lease because NPV = $21,542.69 Mattel should lease because NPV = $27,630.06 Mattel should buy because NPV = $23,514.35 Mattel should buy because NPV = $28,375.29 Mattel should lease because NPV = $18,589.72

Solutions

Expert Solution

The correct answer is: Mattel should lease because NPV = $27,630.06

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.


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