Question

As a financial analyst for Muffin Construction, you have been asked to recommend the method of financing the acquisition of new equipment needed by the firm. The equipment has a useful life of 8 years. If purchased, the equipment, which costs $700,000 will be depreciated using straight-line depreciation to a zero book value. If purchased, the needed funds can be borrowed at a 10% pretax annual rate. Muffin’s weighted after-tax cost of capital is 12%. The actual salvage value at the end of 8 years is expected to be $50,000. Muffin’s marginal tax rate is 40%. Annual, beginning of year lease payments would be $160,000.

Compute the Net Advantage to Leasing; and Should Muffin lease or own the equipment?

Please show your all work! Thank you so much~

Answer 1

Based on the given data, pls find below workings:

Based on these workings, leasing option has net advantage over the Purchase option and hence it is recommended to go for the Leasing option;