There is no investment tax credit available

Reference no: EM13866460

The Carver Paper Company has decided to acquire a $300,000 pulp quality control machine that has a useful life of ten years. A salvage value of $50,000 is expected at the end of year 10(t=10). The machine would be depreciable on a straight-line basis with no salvage value for purposes of depreciation. There is no investment tax credit available (per Tax Reform Act of 1986). The company is trying to determine whether it is better to purchase or lease the machine. If purchased, the acquisition would be financed with a loan. The interest rate would be ten percent (%10) and debt would be due at the end of each year for the year 10 year loan. The annual loan payment includes both principle and interest (amortization). If a lease is chosen , ten lease payments would be required at the end of each year. The first year lease payment (t=1) would be equal to 33,000 with each annual lease payment thereafter increased by seven percent(7%) each year. The lease payments would come from cash on hand. The company will use an operating lease arrangement . The company is in the thirty-four (34%) tax bracket. What is the Present Value (PV) for these two alternatives ? Use a discount rate of fifteen percent (15%) . Be sure to fully justify your answer . Use time lines.

Reference no: EM13866460

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