Reference no: EM133171410
Question - Findley Furniture Company must install $7.3 million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply:
1. The equipment falls in the MACRS 5-year class. The applicable MACRS rates are 22%, 34%, 21%, 10%, 9%, and 4%.
2. The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for $120,000 per year, payable at the end of the year.
3. Findley's federal-plus-state tax rate is 30%.
4. If the money is borrowed, the bank loan will be at a rate of 10%, amortized in 5 equal installments to be paid at the end of each year.
5. The tentative lease terms call for end-of-year payments of $1.35 million per year for 5 years.
6. At the end of the lease term, the equipment will have an estimated salvage value of $850,000. At that time, Findley plans to replace the equipment regardless of whether the firm leases or purchases it.
Required - What is the firm's cost of leasing the equipment? Enter your answer in thousands.
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