The Shakey Company can finance the purchase of a new building costing $2 million with a bond issue, for which it would pay $100,000 interest per year, and then repay the $2 million at the end of the life of the building. Instead of buying in this manner, the company can lease the building by paying $125,000 per year, the first payment being due one year from now. The building would be fully depreciated for tax purposes over an expected life of 20 years. The income tax rate is 40% for all expenses and capital gains or losses, and the firm’s after-tax MARR is 5%. Use AW analysis basedon equity (nonborrowed) capital to determine whether the firm should borrow and buy or lease if, at the end of 20 years, the building has the following market values for the owner: (a) nothing, (b) $500,000. Straight-line depreciation will be used but is allowable only if the company purchases the building.
The Shakey Company can finance the purchase of a new building costing $2 million with a bond issue, for which it would pay $100,000 interest per year, and then repay the $2 million at the end of the life of the building. Instead of buying in this manner, the company can lease the building by paying $125,000 per year, the first payment being due one year from now. The building would be fully depreciated for tax purposes over an expected life of 20 years. The income tax rate is 40% for all expenses and
on equity (nonborrowed) capital to determine whether the firm should borrow and buy or lease if, at the end of 20 years, the building has the following market values for the owner: (a) nothing, (b) $500,000. Straight-line depreciation will be used but is allowable only if the company purchases the building.
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