Arizona State University FIN FIN MISC A company is considering a leasing arrangement to finance some equipment that it needs for the next 4 years. The equipment will be obsolete and…
that it needs for the next 4 years. The equipment will be obsolete and worthless after 4 years. The firm will depreciate the cost of the equipment on a straight-line basis over its 4 year life. It can borrow the purchase price of $2,400,000 at 10% and buy the equipment, or it can make 4 equal end-of-year lease payments of $1,050,000 each and lease it. The loan obtained from the bank is a 4-year simple interest loan, with interest paid at the end of the year. The firm’s tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $120,000, Under the lease arrangement, the lessor, not the lessee, would pay these costs. Should the company lease or buy the asset? Why?
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