Financial Management Assignment

Financial Management Assignment

An equipment costs $1,000,000, the loan rate on the equipment is 10%, and the marginal tax rate is 40%. Assume that the equipment will have 3-year MACRS life but will be used for four years (with the annual depreciation rates of 33.33% the first year, 44.5% the second year, 14.75% the third year, and 7.5% the fourth year). If the company borrows and buys, assume that it can obtain a maintenance contract at a cost of $20,000 per year. The equipment will have a residual value of $ $200,000 at the end of year 4. Assume that the firm can lease the equipment, instead of borrowing and buying it, at a cost of $250,000 per year. Please answer the following questions: 1) What is the present value of the cost of owning? 2) What is the present value of the cost of leasing? 3) Should the firm buy or lease the equipment?

1) -$645,656; 2) -$661,653; 3) Buy
1) -$591,793; 2) -$661,653; 3) Buy
1) -$591,793; 2) -$550,952; 3) Lease
1) -$607,696; 2) -$550,952; 3) Lease

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