Question
In: Finance
HKW Corporation is considering buying a machine that costs $540,000. The machine will be depreciated over...
HKW Corporation is considering buying a machine that costs
$540,000. The machine will be
depreciated over 5 years by the straight-line method and will have
zero salvage value. The
company can also lease the machine with year-end payments of
$145,000. The company can
issue bonds at 9% interest rate. If the corporate tax rate is 35%,
should the company buy or
lease? Explain.
Solutions
Expert Solution
The annual depreciation is calculated below:
The depreciation tax shield cash flow is computed below:
The annual cost of lease payments is $145,000.
The after-tax cost of least payments is calculated below:
The net cash flow in lease option will be $94,250+$37,800=132,050.
The present value of all annual cash flow payments in lease option is calculated below:
The net advantage to leasing is calculated below:
Since the NAL is negative, the firm should not lease the machine.
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