The Smith & Jones Company is considering either the purchase or lease of a new machine...

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Accounting

The Smith & Jones Company is considering either the purchaseor lease of a new machine details asfollows:
                PurchaseCost of newmachine                                                 $97,000
                AnnualMaintenance Costs payable at start ofyear              $10,000
                                                Onlypayable if machine ispurchased.
                MachineUseful Life  5years
Salvage Value at end of 5th year                                       $8,000   (taxed at30%)
Alternatively the machine can be leased with lease paymentscovering all capital and operating costs details asfollows.
                AnnualLeasePayment                 $29,200payable at the start of the year
                Termof lease                                                   5years
Cash savings associated with the acquisition of the machine areexpected to be $50,000 per annum.
Other details:
                Company'sCost ofCapital                                            8%
                CorporateTaxRate                                                     30%
  Required:
Should the Company LEASE the Equipment? Please show theformular. Thanks

Answer & Explanation Solved by verified expert

4.1 Ratings (701 Votes)

Computation of PV of cash outflows In case of purchase of machinery Particulars Year 0 1 2 3 4 5 Initial Cost 97000 Add Cost of maintenance 10000 10000 10000 10000 10000 Less Depreciation Tax Shield 5340 5340 5340 5340 5340 Less Posttax Salvage Value 2400 Net Cash outflow 107000 See Answer

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