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Homework answers / question archive / ABC Machine Tool Company is considering the acquisition of a large equipment to set up its factory in a backward region for $1200000

ABC Machine Tool Company is considering the acquisition of a large equipment to set up its factory in a backward region for $1200000

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ABC Machine Tool Company is considering the acquisition of a large equipment to set up its factory in a backward region for $1200000. The equipment is expected to have an economic useful life of 8 years.

I- The equipment can be financed either with an eight-year term loan at 14% annual interest, repayable in equal installments of $4258676 per year,

or

II -Alternative: by an equivalent amount of lease rent per year.

In both cases, payments are due at the end of the year. The equipment is subject to the straight-line method of depreciation. Assuming no salvage value and a 50% corporate tax rate, which of the financing alternatives should it select?

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