CBC Ltd. wishes to acquire a K100,000 brick making machine which has a useful life of eight years. At the end of this time, the machine's scrap value will be K8,000. The asset will be depreciated using the straight line method over its eight-year life. The company can use either lease or debt financing. Lease payment of K16,000 at the beginning of each of the eight years would be required. If debt financed, the interest rate would be 14 percent and debt payments would be due at the beginning of each of the eight years. (Interest would be amortized as a mortgage-type of debt instrument.) The company is in the 40 percent tax bracket. Which method of financing has the lower present value of cash outflows?
CBC Ltd. wishes to acquire a K100,000 brick making machine which has a useful life of eight years. At the end of this time, the machine's scrap value will be K8,000. The asset will be depreciated using the straight line method over its eight-year life. The company can use either lease or debt financing. Lease payment of K16,000 at the beginning of each of the eight years would be required. If debt financed, the interest rate would be 14 percent and debt payments would be due at the beginning of each of the eight years. (Interest would be amortized as a mortgage-type of debt instrument.) The company is in the 40 percent tax bracket. Which method of financing has the lower present value of cash outflows?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:QUESTION 4
CBC Ltd. wishes to acquire a K100,000 brick making machine which has a
useful life of eight years. At the end of this time, the machine's scrap value
will be K8,000. The asset will be depreciated using the straight line method
over its eight-year life. The company can use either lease or debt financing.
Lease payment of K16,000 at the beginning of each of the eight years would
be required. If debt financed, the interest rate would be 14 percent and
debt payments would be due at the beginning of each of the eight years.
(Interest would be amortized as a mortgage-type of debt instrument.) The
company is in the 40 percent tax bracket. Which method of financing has
the lower present value of cash outflows?
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