After-tax cost of money made available by leasing agreement

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Reference no: EM131907344

The GO Company is considering purchasing a new machine at a cost of $100,000. They plan to retire the machine when it is 10 years old, with a zero salvage value. The company's tax rate is 40%, and the machine would be depreciated for tax purposes using straight-line depreciation for 10 years. Consideration is being given to renting the machine instead, again for a 10-year period. Under this arrangement, the company would pay a deposit of $18,000 (to be returned at the termination of the rental), and a rental charge of $16,000 at the end of each year. (a) If the company decides to lease the machine, what would be the after-tax cost of the money made available by the leasing agreement? (Hint: This is the incremental rate of return corresponding to the difference between renting the machine and buying it.) (b) Now compute the after-tax cost of money from leasing if the rental payments are subject to 6% inflation per year. Explain in words why the answer is different than your answer to part (a).

Reference no: EM131907344

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