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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

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 9P
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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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