Decide whether to lease or purchase an asset

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Reference no: EM131211449

Suppose a company wants to decide whether to lease or purchase an asset.

Purchase: The capital cost required to purchase the asset is $1,000,000 (at time zero) with a salvage value of $500,000 at the end of the 5th year. The purchased asset can be depreciated based on MACRS 5-year life depreciation with the half year convention over six years (from year 0 to year 5).

Lease: The asset can be leased for 5 years and annual lease payments (LP) of $250,000 (from year 1 to year 5).

The asset would yield the annual revenue of $350,000 for five years (from year 1 to year 5) and operating cost of $60,000 for year 1 to 5.

Considering income tax of 35% and minimum ROR of 16%, calculate the ATCF and NPV for both alternatives and conclude which alternative is a better decision.

Reference no: EM131211449

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