You are deciding between the outright purchase of a machine with an expected five-year life...
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You are deciding between the outright purchase of a machine with an expected five-year life for $15,000 and a five-year lease of the asset. The companys tax rate is 34%. If you lease the machine, you would make annual lease payments of $3.900 per year (recall the payments are tax-deductible), but would lose out on the depreciation tax shield associated with purchasing the asset (assume the machine could/would be straight line depreciated over the five years). Assume all cash flows occur at the end of each year. What is the implied cost of financing associated with undertaking the lease? Please present your answer in percentage terms (e.g., 3.45%).
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