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ABC is considering a leasing arrangement to finance some special manufacturing tools that is needed for...

  1. ABC is considering a leasing arrangement to finance some special manufacturing tools that is needed for production during the next four years. A planned change in the firm’s production technology will make the tool obsolete after 4 years. The firm will depreciate the cost of the tools on a straight-line basis. The firm can borrow $4,200,000, the purchase price, at 10% to buy the tools or make four equal end of the year lease payments of $2,250,000. The firm’s tax rate is 34% and the firm’s before-tax cost of debt is 10%. Annual maintenance costs associated with ownership are estimated at $275,000. Should the firm lease or buy? * Could you show the work on a spread sheet please.*

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Expert Solution

It will be prefferable to buy the asset than to lease the same as it results in lesser present value of cash outflow as computed in below spreadsheet.

jeff jeffy answered 1 year ago
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