7. VICTOR, Inc. plans to either lease or buy equipment. The equipment has a 3-ye

Question

7. VICTOR, Inc. plans to either lease or buy equipment. The equipment has a 3-year life with no salvage expected. The company will depreciate on a straight-line basis over 3 years. The company can borrow the $6 million purchase price at 10% to buy the equipment or make 3 equal end-of-year lease payments of $3 million each to lease them. The company's tax rate is 30%. The company would pay maintenance of $100,000 per year regardless of whether it purchases or leases. What is the cost of purchasing the equipment? ??? 1. $4,800,000 ? 2. $3,606,311 ? 3. $3,540,328 ??4. $3,516,954 ? 5. none of the above 8. See Questions 7. What is cost of leasing the equipment? 1. $3,516,954 2. $3,857,745 3. $3,306,638 4. $3,929,328 5. none of the above 9. See Questions 7 and 8. Calculate net advantage to leasing (NAL). Based on NAL, The company should: 1. purchase the equipment because NAL is positive 2. lease the equipment because NAL is positive 3. purchase the equipment because NAL is negative 4. lease the equipment because NAL is negative 5. none of the above

Explanation / Answer

4. $3,516,954 1. purchase the equipment because NAL is positive

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