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In: Economics

The Shakey Company can finance the purchase of a new building costing​ $2 million with a...

The Shakey Company can finance the purchase of a new building costing​ $2 million with a bond​ issue, for which it would pay $110,000 interest per​ year, and then repay the​ $2 million at the end of the life of the building. Instead of buying in this​ manner, the company can lease the building by paying $125,000 per​ year, the first payment being due one year from now. The building would be fully depreciated for tax purposes over an expected life of 20 years. The income tax rate is 40​% for all expenses and capital gains or​ losses, and the​ firm's after-tax MARR is 5​%. Use AW analysis based on equity​ (nonborrowed) capital to determine whether the firm should borrow and buy or lease​ if, at the end of 20​ years, the building has the following market values for the​ owner: ​(a)​nothing, ​(b) $500,000. ​Straight-line depreciation will be used but is allowable only if the company purchases the building.

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Rahul Sunny answered 1 year ago
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