Problem
A plant can be purchased for $1,000,000 or it can be leased for $200,000 per year. The annual income is expected to be $800,000 with the annual operating cost of $200,000. The resale value of the plant is estimated to be $400,000 at the end of its 10- year life. The company's combined federal and state income tax rate is 40%. A straight-line depreciation can be used over the 10 years with the full first-year depreciation rate.
(a) If the company uses the after-tax minimum attractive rate of return of 10%, should it lease or purchase the plant?
(b) What is the breakeven rate of return of purchase versus lease?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.