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Financing the purchase using the lease-equivalent loan

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Reference no: EM131051145

Riverton Mining plans to purchase or lease $435,000 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 $101,169 per year for five years. Assume Riverton's borrowing cost is 7.5%, its tax rate is 30%, and the lease qualifies as a true tax lease.

a) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?

The amount of the lease-equivalent loan is $........... (Round to the nearest dollar.)

b) Is Riverton better off leasing the equipment or financing the purchase using the lease-equivalent loan?

Riverton is better off . (Fill in either "financing the purchase" or "leasing the equipment")

c) What is the effective after-tax lease borrowing rate? How does this compare to Riverton's actual after-tax borrowing rate?

The effective after-tax lease borrowing rate is..... %. (Round to two decimal places.)

Reference no: EM131051145

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