Calculate the cash flow - capital cost, Cost Accounting

A company is evaluating the following lease or buy option. 

A four year lease with annual payments of $25,000 payable at the beginning of the year. The tax shield is available at the end of the year.  The company's tax rate is 25% and company's cost of capital is 12%. 

The machine costs $85,000 has a four year useful life with no residual value.  If financed the asset would be financed through a term loan at 10%.  The loan calls for equal payments to be made at the end of each year for four years. The machine would qualify for accelerated capital cost allowance written off on a straight line basis over two years.

 

Calculate the cash flows for each alternative.  Which alternative is the most attractive?

Posted Date: 3/8/2013 4:06:55 AM | Location : United States







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