Reference no: EM131173246
Riverton Mining plans to purchase or lease $435,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $101,169 per year for five years. Assume Riverton's borrowing cost is 7.5%, its tax rate is 30%, and the lease qualifies as a true tax lease.
a.) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?
The amount of the lease-equivalent loan is $...... (Round to the nearest dollar.)
b.) Is Riverton better off leasing the equipment or financing the purchase using the lease-equivalent loan?
Riverton is better off ......... (Fill in either "financing the purchase" or "leasing the equipment")
c.) What is the effective after-tax lease borrowing rate? How does this compare to Riverton's actual after-tax borrowing rate?
The effective after-tax lease borrowing rate is...... %. (Round to two decimal places.)
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