The firms tax rate is 40 annual maintenance costs

Reference no: EM13483819 , Length: 25

Consider the information presented in the text and take a case for or against the current use of lease financing in today's economic climate. Keep in mind long term interest rates, the things we know about working capital management, a manager's need to keep WACC low, and the value of project options in making your argument. You are encouraged to use outside sources to support your contentions.

Show your source references. When you finish, answer the following question.

Patriot Welding is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands?

Reference no: EM13483819

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