Question
In: Finance
The Misthosi Company is considering the acquisition of a machine that costs of $50,000 if bought...
- The Misthosi Company is considering the acquisition of a machine that costs of $50,000 if bought today. The company can buy or lease the machine. If it buys the machine, the machine would be depreciated as a 3-year MACRS asset and is expected to have a salvage value of $1,000 at the end of the 5-year useful life. If leased, the lease payments are $12,000 each year for five years, payable at the beginning of each year. The tax rate of Mishthosi is 30% and its cost of capital is 10%. Compare the option of buying and leasing to help the company decide which alternative they should choose. Please show all work using EXCEL and show contents in each cell.
3-Year MACRS
|
Year |
Rate |
|
1 |
33.33% |
|
2 |
44.45% |
|
3 |
14.81% |
|
4 |
7.41% |
Solutions
Expert Solution
Cost of leasing is lesser than buying. Hence they should lease the machine.
| BUY | ||||
| Year | Cost | Tax shield on depreciation | Salvage after tax | Net Cash flow |
| 0 | -50000 | -50000 | ||
| 1 | 4999.500 | 4999.5 | ||
| 2 | 6667.500 | 6667.5 | ||
| 3 | 2221.500 | 2221.5 | ||
| 4 | 1111.500 | 1111.5 | ||
| 5 | 700 | 700 | ||
| NPV | -37081.81 |
| LEASE | |
| Year | Lease after tax |
| 0 | -8400 |
| 1 | -8400 |
| 2 | -8400 |
| 3 | -8400 |
| 4 | -8400 |
| 5 | 0 |
| NPV | -35026.87 |
WORKINGS
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