Insurance and other cost will be borne by the firm

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Reference no: EM132166042

Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt id 9%. The terms of the lease and purchase are as follows:

Lease:

The leasing arrangement requires end of year payment of $19,800 over 5 years. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. Lessee will exercise its option to purchase the asset for $24,4000 at termination of the lease.

Purchase:

If the firm purchases the machine, the cost of $80,000 will be financed with a 5-year, 14% loan requiring equal end of year payments of $23,302. The machine will be depreciated under MACRS using a 5-year recovery period. (See MACRS table below). The firms will pay $2,000 per year for a service contract that covers all maintenance costs; insurance and other cost will be borne by the firm. The firm plans to keep the equipment and use it beyond its 5-year recovery period.

Reference no: EM132166042

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