​A Firm Could Buy an Asset for $20,000 by Borrowing

Essay

​A firm could buy an asset for $20,000 by borrowing the funds at 10 percent for four years with interest paid annually and the entire loan repaid at maturity. The firm could lease the equipment for $5,800 a year including maintenance. If the firm does buy, maintenance will be $600 a year. The estimated after-tax salvage value is $1,250, and depreciation will be $5,000 annually. Construct projected cash outflows for each alternative for each year. Assume a 30 percent income tax rate. Is leasing the better alternative if the firm uses a cost of funds of 10 percent?