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$775000, and will last for 5 years. The expected scrap value at the end of 5th year is $140000. Assume that the equipment will be fully depreciated under straightline method. The tax rate is 35%, the cost of equity i

$775000, and will last for 5 years. The expected scrap value at the end of 5th year is $140000. Assume that the equipment will be fully depreciated under straightline method. The tax rate is 35%, the cost of equity i

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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BigCo is considering leasing the new equipment that it requires, for $146000 a year, payable in advance.
The cost of the equipment is $775000, and will last for 5 years.
The expected scrap value at the end of 5th year is $140000.
Assume that the equipment will be fully depreciated under straightline method.
The tax rate is 35%, the cost of equity is 13% and the cost of debt is 10%.
i. What is the net cost of buying? 
ii. What is the net cost of leasing? 
iii. What is the net advantage of leasing (NAL)? 
iv. What is the maximum lease payment that would make BigCo indifferent between leasing or buying?
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