See table 32 on page 100 for the applicable

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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 years. (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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