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

BUY OPTION LEASE Year 0 Details of cost PV F @ 11% PV @ 11% PV @ 11% Year 0 Initial Cost 1500000 1 1500000 1 Annual Tax savings -depn.tax shield400000*0.30 -120000 0.9009 -108108 Annual lease amt. 350000 315315 2 -120000 0.81162 -97394 350000 284067 3 -120000 0.73119 -87743 350000 255917 Salvage value -less tax (30%)on sale300000*0.70 -210000 0.73119 -153550 1053205 855299 Cost Difference 197906 Annual depreciation = (1500000-300000)/3 Ie. 400000 Lease option is recommended as it is cheaper by $ 197906.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.