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Question - Acme Storage is evaluating an investment to produce a new product with an extended marketable life of 4 years. In order to produce this product, the company will have to acquire a piece of new equipment worth $400,000. The opportunity cost of borrowing for an asset which has a purchase price of $400,000 is 15%. Other details of each alternative are provided as follows:
Purchase: This equipment can be depreciated at 30% reducing balance if owned, and has an expected salvage value of $100,000 after 4 years.
Lease: If the lease is in advance, there will be four payments of $145,000 made at the beginning of each year and a residual payment of $40,000 made at the end of the term, i.e., at the end of year 4.
The company tax rate is 25%. Calculate the NPV of leasing and advise the company as to whether it should purchase or lease the equipment with payments made in advance?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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