AFX Sdn Bhd is trying to decide whether to accept a business loan or a lease financing facility for an equipment purchase. The equipment cost $60,000 with 3-year economic life, depreciated annually based on MACRS 3-year class with the following rates: Year 1 = 33%; Year 2 = 45%; Year 3 = 15%; Year 4 = 7%. If AFX accepts the business loan option, the 3-year loan will attract an interest rate at 12% interest calculated on a yearly reducing balance. AFX would have to maintain the equipment with an annual maintenance fee of $4,000, payable after services have been rendered. Annual insurance premium is $1,400 on cash before cover basis. AFX is planing to sell the equipment after its useful life for $3,000. Should AFX opt for lease financing, the annual lease rental to be paid in advance is $21,000. You also intend to exercise the option to purchase the equipment for $6,000 at the end of the lease period. Your company’s tax rate is 35%. Company’s after-tax cost of debt is 8%. Which option should the company choose, lease or purchase? Explain. Note: Roud all the figures to the neares dollar.
AFX Sdn Bhd is trying to decide whether to accept a business loan or a lease financing facility for an equipment purchase. The equipment cost $60,000 with 3-year economic life,
If AFX accepts the business loan option, the 3-year loan will attract an interest rate at 12% interest calculated on a yearly reducing balance. AFX would have to maintain the equipment with an annual maintenance fee of $4,000, payable after services have been rendered. Annual insurance premium is $1,400 on cash before cover basis. AFX is planing to sell the equipment after its useful life for $3,000.
Should AFX opt for lease financing, the annual lease rental to be paid in advance is $21,000. You also intend to exercise the option to purchase the equipment for $6,000 at the end of the lease period. Your company’s tax rate is 35%. Company’s after-tax cost of debt is 8%.
Which option should the company choose, lease or purchase? Explain.
Note: Roud all the figures to the neares dollar.
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