You work as financial analyst at Herman Miller Furniture company. You are evaluating g a potential lease agreement on a new machine. The new machine can be purchased on January 1 for $10,000 and can be depreciated over 5-year period using straight line method. The machine has an 8-year actual life and the salvage value at the end of the 8 years is $0. The operating expenses of the machine will be $500 per year. The lease calls for 8 annual payments of $2,000 per year with the first payment occurring immediately. (assume the lease payments will occur at the beginning of each year and the tax benefits associated with the lease payment occurs at the end of the year) the interest rate on the company’s debt is 10%. The weighted average cost of capital of the firm is 15%. The corporate tax rate is 30%.
What is the cost of owning?
What is the cost of leasing?
What is Net Advantage to Leasing/
What is the minimum salvage value for you to be indifferent between lease and buying?