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Describe the impact on the financial statements

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Reference no: EM132707756

Question - You are looking to expand your business and for that you will need to invest in some expensive new technology and machinery. The new machinery has a cash price of $1.5 million. You have two potential options to pay for this investment.

Option 1: You can enter into a capital lease (and essentially buy this machinery directly). The lease calls for an initial down payment of $250,000 and then six annual year-end installments of $270,393

Option 2: A bank will lend you the $1.5million with no down payment and eight annual year-end payments of $281,114.71

Required -

1. What is the effective ("market") interest rate in each of the two financing arrangements?

2. Briefly describe the impact on the financial statements (i.e. Balance Sheet, Income Statement and Cash Flow Statement) of the two financing choices above.

Reference no: EM132707756

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