Reference no: EM132588494

Question - Western Trucking Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows.

Lease: The leasing arrangement requires BEGINNING of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment.

Purchase: If the firm purchases the machine, its cost is $80,000 will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years.

a) Determine the after-cash outflow for Western Trucking under each alternative.

b) Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt.

c) Which alternative-lease or purchase would you recommend? Justify.