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Unformatted text preview: ar life. It will be depreciated under MACRS using a 5-year recovery period. (See Table 3.2 on page 100
for the applicable depreciation percentages.) The total purchase price will be
financed by a 5-year, 15% loan requiring equal annual end-of-year payments of
$5,967. The firm will pay $1,000 per year for a service contract that covers all
maintenance costs; insurance and other costs will be borne by the firm. The firm
plans to keep the equipment and use it beyond its 5-year recovery period.
a. For the leasing plan, calculate the following:
(1) The after-tax cash outflow each year.
(2) The present value of the cash outflows, using a 9% discount rate.
b. For the purchasing plan, calculate the following:
(1) The annual interest expense deductible for tax purposes for each of the 5
(2) The after-tax cash outflow resulting from the purchase for each of the 5
years. CHAPTER 16 Hybrid and Derivative Securities 701 (3) The present value of the cash outflows, using a 9% discount rate.
c. Compare the present values of the cash outflow str...
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- Fall '13