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The Hybee Company is evaluating an investment to produce a new product with an expected marketable life of 5 years. The expected annual net cash flow before tax is $120,000. To produce this product the company will have to acquire a new plant. The company can either purchase this plant or leave it. Details of these alternatives are as follows:
Purchase
The purchase price of the plant is $250,000 and it is expected that it will have a zero residual value after 5 years. The allowable annual depreciation charge on the plant is 20% per annum, straight-line.
Lease
The lease requires five annual payments, each of $60,000, payable at the beginning of each year. The company tax rate is 30 cents in the dollar. The required rate of return on the investment is 15% per annum after tax and the after-tax cost of an equivalent loan is 8% per annum.
Should the company undertake the investment? If so, should it purchase or lease the plant?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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