The DASH80 Company has just sold non-strategic assets for $2 million for the pur
ID: 2716339 • Letter: T
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. Arial 3 (12pt) Paragraph Font family Font size 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 EQUIPMENT IS PURCHASED
RETURN = 220000
(-)TAX = 66000
AFTER TAX = 154000
BDAT = 554000 (154000 + 400000)
IF EQUIPMENT IS TAKEN ON LEASE
RETURN = 220000
TAX = 66000
AFTER TAX =154000
THUS IT IS BETTER TO PURCHASE THAT EQUIPMENT RATHER TAKING ON LEASE
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