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Question - The Redding Company is considering the acquisition of a machine that costs $1,000,000 if bought today. The company can buy or lease the machine. If it buys the machine, the machine would be depreciated as a 3-year MACRS asset and is expected to have a salvage value of $50,000 at the end of the 5-year useful life. If leased, the lease payments are $240,000 each year for 4 years, payable at the beginning of each year. The marginal tax of the Redding Company is 30% and the cost of capital is 12%. Use the MACRS rates provided below and assume that the lease is a net lease, that any tax benefits are realized in the year of the expense, and that there is a $90,000 investment tax credit.
1. Calculate the depreciation for each year in the case of the purchase of the machine.
2. Calculate the direct cash flows from leasing initially and for each of the 5 years.
3. Calculate the adjusted discount rate.
4. Calculate the NPV of the lease.
5. Calculate the amortization of the equivalent loan.
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