Determine should reynolds lease or buy the equipment

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Reference no: EM13334908

Assume that Reynold's tax rate is 40% and that the equipment's depreciation would be $100.00 per year. If the company leased the asset on a 2 year lease, the payment would be $110.00 at the beginning of each year. If Reynold's borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should Reynolds lease or buy the equipment?

Reynolds Construction needs a new piece of equipment that costs $200.00. Reynolds can either lease the equipment or borrow $200 bfrom a local bank to buy the equipment. If the equipmentr is leased, the lease would not have to be capitalized. Reynolds balance sheet prior to the aquisition of the equipment is as follows:
Current Assets	$300.00	Debt	$400.00
Net Fixed Assets	$500.00	Equity	$400.00
Total Assets	$800.00	Total Liabilities	$800.00

Reference no: EM13334908

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