Company wishes to expand its productive capacity

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Reference no: EM131956444

Gate Company wishes to expand its productive capacity. In order to do so it must acquire a new machine costing $40,000.The machine can be purchased or leased. The firm is in the 40 percent tax bracket and its after-tax cost of debt is currently 6 percent. If the firm purchased the machine, the purchase would be totally financed with a 10 percent loan requiring equal annual end-of-year payments over 5 years. The machine would be depreciated straight-line over its 5-year life. A salvage value of zero is anticipated. The life of a lease would be 5 years. The lessor intends to charge equal annual lease payments that will enable it to earn 15 percent on its investment. REQUIRED: Which alternative (lease or purchase) would you recommend? Why?

Reference no: EM131956444

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