Problem 3

Problem 3 - 4 \$2,964.00 \$1,185.60 \$939.11 Salvage Value...

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1. Determine The After-tax Cost of Capital Cost of Debt Capital 10.00% Tax Rate 40.00% After-tax Cost of Debt 6.00% (10%*(1-.40)) 2. We do not include the loan repayments or interest because those are implied in the after-tax cost of 3. Present Value of Owning Present Value Initial investment \$(40,000.00) \$(40,000.00) Annual Depreciation Amount Tax Savings 1 \$13,332.00 \$5,332.80 \$5,030.94 2 \$17,780.00 \$7,112.00 \$6,329.65 3 \$5,924.00 \$2,369.60 \$1,989.56

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Unformatted text preview: 4 \$2,964.00 \$1,185.60 \$939.11 Salvage Value Salvage Amount \$10,000.00 Tax Cost (4,000.00) Net Salvage Realized \$6,000.00 \$4,752.56 Net Present Value of Owning \$(20,958.17) 4. Present Value of Leasing Annual Lease Payments \$(10,000.00) Tax Savings 4,000.00 Net Outlay after taxes \$(6,000.00) Present Value of Leasing (\$22,038.07) Based upon this analysis, the firm should buy the asset, not lease it. f debt....
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