Reynolds Corporation plans to purchase equipment at a cost of $3 million. The company's tax-rate is 30 percent and the equipment's depreciation would be $600,000 per year for 5 years. If the company leased the asset on a 5-year lease, the payment would be $700,000 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge 11 percent interest on the loan. a. Calculate the cost of purchasing the equipment with debt. b. calculate the cost of leasing the equipment. c. calculate NAL
Reynolds Corporation plans to purchase equipment at a cost of $3 million. The company's tax-rate is 30 percent and the equipment's depreciation would be $600,000 per year for 5 years. If the company leased the asset on a 5-year lease, the payment would be $700,000 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge 11 percent interest on the loan. a. Calculate the cost of purchasing the equipment with debt. b. calculate the cost of leasing the equipment. c. calculate NAL
Related questions
Leasing
Connors Construction needs a piece of equipment that can either be leased or purchased. The equipment costs $300. One option is to borrow $300 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. If Connors chooses to lease the equipment, it would not capitalize the lease on the balance sheet. Below is the company's balance sheet prior to the purchase or leasing of the equipment:
| Current assets | $350 | Debt | $500 | |
| Fixed assets | 500 | Equity | 350 | |
| Total assets | $850 | Total liabilities and equity | $850 |
What would be the company's debt ratio if it chose to purchase the equipment? Round your answer to two decimal places.
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What would be the company's debt ratio if it chose to lease the equipment? Round your answer to two decimal places.
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Would the company's financial risk be different depending on whether the equipment was leased or purchased?
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The company's financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is no different whether the equipment is leased or purchased.
The company's financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is greater if the equipment is leased.
The company's financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is greater if the equipment is purchased.
The company's financial risk (assuming the implied interest rate on the lease is greater than the interest rate on the loan) is no different whether the equipment is leased or purchased.
The company's financial risk (assuming the implied interest rate on the lease is less than the interest rate on the loan) is no different whether the equipment is leased or purchased.
