Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 21 Nov 2017 My Price 9.00

Eastern Trucking Company

Eastern Trucking Company needs to expand its facilities. 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 percent tax bracket, and its after-tax cost of debt is 5.4 percent. The terms of the lease and purchase plans are as follows: Lease. The leasing arrangement requires beginning-of-year payments of $16,900 over five years. The lessor will pay all maintenance costs; the lessee will pay insurance and other costs. The lessee will exercise its option to purchase the asset for $20,000 paid along with the final lease payment. Purchase. If the firm purchases the machine, its cost of $80,000 will be financed with a five-year, 9 percent loan requiring equal end-of-year payments of $20,567. The machine will be depreciated under MACRS using a fi ve-year recovery period. (See Table 9.1 for applicable MACRS

percentages.) The firm will pay $2,000 per year for a service contract that

covers all maintenance costs; the firm will pay insurance and other costs.

The firm plans to keep the equipment and use it beyond its five-year recovery

period.

a. Determine the after-tax cash outflows of Eastern Trucking under each

alternative.

b. Find the present value of the after-tax cash outflows for each alternative

using the after-tax cost of debt.

c. Which alternative, lease or purchase, would you recommend? Why?

Answers

Maurice Tutor
(5)
Status NEW Posted 21 Nov 2017 08:11 PM My Price 9.00

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