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In: Finance
Riverton Mining plans to purchase or lease $ 430 comma 000$430,000 worth of excavation equipment. If...
Riverton Mining plans to purchase or lease
$ 430 comma 000$430,000
worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be
$ 97 comma 133$97,133
per year for five years. Assume Riverton's borrowing cost is
7.0 %7.0%,
its tax rate is
40 %40%,
and the lease qualifies as a true tax lease.
a. If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?
b. Is Riverton better off leasing the equipment or financing the purchase using the lease-equivalent loan?
c. What is the effective after-tax lease borrowing rate? How does this compare to Riverton's actual after-tax borrowing rate?
Solutions
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jeff jeffy answered 1 year agoRelated Solutions
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