You are considering the purchase of a new machine for fabricating metal products

Question

You are considering the purchase of a new machine for fabricating metal products. You must decide whether to pay the $10,000 purchase price in cash, or to pay $4,000 down and borrow the remaining $6,000 at 10% interest. The machine was purchased on January 1, 2011, and will be sold on December 31, 2014. The bank will give you a four year loan on which you will repay $1,500of the initial principal, plus the interest due, on December 31 each year (i.e., the end of each year). You will use MACRS depreciation. You expect to sell the machine for $2,000 on December 31, 2014. If you expect the equipment to have net revenues minus expenses of $3,000 per year, and you have an incremental income tax rate of 40%, which option should you select? Assume the MARR at 15%.

(hint: interest on loan is considered as business expense and is tax exempted)

Explanation / Answer

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