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To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering...

To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 35%. Annual end-of-year maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. If the lease is a guideline lease, what is the cost of owning?

A. -$3,368,000

B. -$4,800,000

C. -$3,730,000

D. -$2,575,868

E. -$3,474,000

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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