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Homework answers / question archive / A company can either purchase or lease a $200,000 machine with a useful life of 8 years
A company can either purchase or lease a $200,000 machine with a useful life of 8 years. The machine could be fully depreciated on a straight-line basis over its useful life, at the end of which it would have no salvage value. The lease would involve 8 annual installments of $40,000, each due at the end of the year. The company's cost of debt is 10% and the tax rate is 20%. What is the expected increase in the firm's debt capacity if it chooses to buy instead of lease? $330,431.74 $212,625.64 $183,892.45 $197,392.27 $200,000.00
Correct Answer :$200,000
1 .Leasing is not viewed as debt .Leasing increased the real leverage of the company which increase the earnings per share, but it did not affect the measured leverage of the company.
So lease will not consider as debt that is why expected increase in debt capacity due to buy will be $200,000.
