Which method of financing has the lower present value

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Reference no: EM131197254

US Blivet wishes to acquire a $100,000 blivet-degreasing machine, which it plans to use for eight years. At the end of this time, the machine's residual value will be $24,000. The asset falls into the five-year property class for cost recovery (depreciation) purposes. The company can use either a "true" lease or debt financing. Lease payments of $16,000 at the beginning of each of the eight years would be required. If debt financed, the interest rate would be 14 percent, and debt payments would be due at the beginning of each of the eight years. (Interest would be amortized as a mortgage-type of debt instrument.) The company is in a 40 percent tax bracket.

Which method of financing has the lower present value of cash outflows?

Reference no: EM131197254

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