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Comey Products has decided to acquire some new equipment having a $170,000 purchase price. The equipment...


Comey Products has decided to acquire some new equipment having a $170,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comeyâ€s question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar.
$   

Solutions

Expert Solution

Solution :-

After Tax Cost of Debt = 5% * ( 1 - 0.25 ) = 3.75%

Therefore cost of borrowing = $130,442

If there is any doubt please ask in comments

jeff jeffy answered 1 year ago
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