Evaluating whether to lease or purchase equipment

Assignment Help Financial Accounting

Reference no: EM131202139

Thomas Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. The company expects to use the equipment for 5 years, with no expected salvage value. The purchase price is $1 million and MACRS depreciation, 3-year class, will apply. If the company enters into a 5-year lease, the lease payment is $230,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 11 percent.

a. Calculate the cost of purchasing the equipment with debt

b. Calculate the cost of leasing the equipment.

c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment?

Reference no: EM131202139

Questions Cloud

Statements about the process are accurate : A retailer buys a pair of socks that were originally priced at $1 a pair including the manufacturer's profit margin of 7%. The exporter takes only a 3% margin on the socks, the wholesaler takes a 5% margin on the socks, a distributor earns an 11% mar..

What other manufacturing overhead expenses : What other manufacturing overhead expenses would be incurred in this production process in addition to the indirect material or indirect labor? Be specific and thorough , make reasonable guess if not known for certain using examples provided in textb..

Exemplary of price discrimination : Which of the following is exemplary of price discrimination?

Calculate expected net present value of the project : Caravan Gaming Company is interested in developing a new facility in Brazil. The company estimates that the project would require an initial investment of $31 million. The company expects that the project will produce positive cash flows of $5,050,00..

Evaluating whether to lease or purchase equipment : Thomas Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. The company expects to use the equipment for 5 years, with no expected salvage value. The purchase price is $1 million and MACRS depreciation, 3-year..

What are firm income tax liability and its after-tax income : The Talley Corporation had a taxable income of $345,000 from operations after all operating costs but before (1) interest charges of $69,000, (2) dividends received of $10,350, (3) dividends paid of $17,250, and (4) income taxes. What are the firm's ..

How much was paid to the common stockholders : Bellamy Corporation paid $100,000 in dividends. The corporation had 10,000 shares of common stock outstanding and 5,000 shares of $100 par value 5% preferred stock. The preferred stock was two years in arrears prior to the current year. How much was ..

Uncommon for anyone employed in the field of taxation : It is uncommon for anyone employed in the field of taxation, whether they be accountants, attorneys or IRS employees, to know, every section in the Internal Revenue Code, their unique requirements, the rules in the Treasury Regulations accompanying e..

Assume that all costs are fixed and except supply costs : You are considering starting a walk-in clinic. Assume that all costs are fixed, except supply costs, which are variable. Furthermore, assume that the clinic must pay taxes at a 30 per-cent rate.

User Account

All Pages