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To finance some manufacturing tools it needs for the next 3 years Waldrop Corporation is considering a leasing arrangement THe tools will be obsolete and worthless after 3 years The firm will

To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. THe tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. The entire principal is paid at the end of three years.

 

A) WHat is the NPV of the purchase alternative?

 

B) What is the NPV of the leasing alternative?

 

May 14 2020 View more View Less

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