The DASH80 Company has just sold non-strategic assets for $2 million for the pur

Question

The DASH80 Company has just sold non-strategic assets for $2 million for the purpose of self-financing a capital expansion program that may include purchase of a piece of manufacturing equipment for $1.5 million. The company’s tax rate is 30%, its required rate of return is 11%, the estimated salvage or recovery value of the equipment at the end of 3 years is $300,000. Given the high-tech nature of its industry, the conservative approach is to use a depreciable life of 3 years on a straight line basis. The alternative is to lease the same piece of equipment for $350,000 over the same period. Should DASH 80 lease or buy? Show your work to justify your decision or recommendation.

Explanation / Answer

If the asset financing is done from own resources of DASH80 $ Asset Cost 1500000 Recovery Value -300000 Depreciable Value 1200000 No. of years 3 years Depreciation/year 400000 Tax Rate @ 30% -120000 Post Tax Impact 280000 Lease Cost 350000 Ideally, DASH80 should buy the equipment instead of leasing the same.

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