The firm be indifferent between leasing and buying asset

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Reference no: EM131359821

Suppose that a machine can be purchased for $10,000. This machine will save the firm $6,000 per year over its useful life of five years regardless of whether it is purchased or leased. Assume straight-line depreciation and a tax rate of 34%. The machine has no terminal value.

a. If the lease payment is $2,500 per year, is it worthwhile for the firm to lease the equipment instead of buying it? I.e., compute the cost to buy and the cost to lease.

Assume that lease payments are made at the end of each year.

b. At what lease payment would the firm be indifferent between leasing and buying the asset?.

Hint: At the level of indifference, NPV=0.

c. If the lease payment is above (below) the value computed in (b), what option should the firm choose?

Reference no: EM131359821

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