You are CFO of a company that has decided to acquire an expensive piece of equip

Question

You are CFO of a company that has decided to acquire an expensive piece of equipment. The main point of this capital asset acquisition is buy or lease decision.

If you are convinced that the government is going to both raise the tax rate for corporations and eliminate some statutory deductions now used as incentives to corporations for acquiring capital assets, but you are also convinced that your company's WACC (weighted average cost of capital) is going to rise from 10% to 40%, which one of these two purchase methods (lease or cash purchase) do you suggest ?

Please explain your answer and keep it brief...Focus only on the question being asked !!!!!!!!!!!!!!!

Explanation / Answer

The CFO of the company should take decision to acquire the expensive equipment on lease due to the following:

1. WACC is going to increase i.e. investors will demand more dividend which will require cash flow in the company to pay out those dividend in time, in order to satisfy the investors.So we cannot buy the equipment, however we should take it on lease.

2. Tax is going to be on higher side and deductions may also get reduced which will result in higher taxes in future. So with lease option we can reduce our tax liability.

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