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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 under MACRS rules for 7-year class assets. If purchased, the needed funds can be borrowed at a 10 percent pretax annual rate. Muffin's weighted after-tax rate of capital is 12 percent. The actual salvage value at the end of 8 years is expected to be $50,000. Muffin's marginal ordinary tax rate is 40 percent. Annual, beginning-of-year lease payments would be $160,000.
a. Compute the net advantage to leasing.
b. Should Muffin lease or own the equipment?
International trade agreements eliminate trade barriers between countries, promote investments, infuse competitiveness, enhance productivity, create jobs, and provide consumers with a greater range of options at cheaper prices.
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