The Lavish Carpet Manufacturing Co. has decided acquire a new machine that has an economic life of...

80.2K

Verified Solution

Question

Finance

TheLavish Carpet Manufacturing Co. has decided acquire a new machinethat has an economic life of 10 years, with no residual value. Themachine can be purchased for $75,000, and the supplier is willingto advance $45,000 of the purchase price at 12 percent. The loan isto be repaid in equal instalments over 10 years. Lavish Carpet pays40 percent corporate income tax and can claim 20 percent capitalcost allowances on the purchased asset. It expects to negotiate afurther $30,000, 10-year loan with a financial institution at 14percent interest, thereby financing any purchase entirely throughdebt. Meanwhile, Midland Leasing Ltd has also offered make theequipment available under a 10 year financial lease. Lease paymentsof $11,200 are to be paid at the end of each year. How should theasset be acquired?

Answer & Explanation Solved by verified expert

4.3 Ratings (664 Votes)

The required rate of return is given Let us assume it is10Purchase optionThe present value of this option present value of loanprincipal repayments present value of See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

TheLavish Carpet Manufacturing Co. has decided acquire a new machinethat has an economic life of 10 years, with no residual value. Themachine can be purchased for $75,000, and the supplier is willingto advance $45,000 of the purchase price at 12 percent. The loan isto be repaid in equal instalments over 10 years. Lavish Carpet pays40 percent corporate income tax and can claim 20 percent capitalcost allowances on the purchased asset. It expects to negotiate afurther $30,000, 10-year loan with a financial institution at 14percent interest, thereby financing any purchase entirely throughdebt. Meanwhile, Midland Leasing Ltd has also offered make theequipment available under a 10 year financial lease. Lease paymentsof $11,200 are to be paid at the end of each year. How should theasset be acquired?