Your boss asks you to review an option to lease equipment storage facility that the firm needs. You are to compare it with the purchase of the facility. The following information are pertinent to your decision: (do on excel)
The facility will be needed for 10 years
Facility maintenance is expected to cost $67,000 per year
The cost to lease the facility is $325,000 per year at the beginning of each year
The purchase price of the facility is $5,000,000 and the market value at the end of five years is expected to be $6,000,000
The before-tax cost of the debt is 9%, and the tax rate is 40%
The company’s current EBIT is $2,000,000 (before leasing or purchasing the facility)
A) Assuming that the facility has a ten-year depreciation life for tax purposes ( it can be fully depreciated over ten-years), compute the NPV for each option and based on the cost, indicate your decision (round to nearest $1,000)
B) Assuming that the facility has a seven- year depreciation life for tax purposes (it can be fully depreciated over ten years), compute the NPV for each option and based on the cost, indicate your decision (round to nearest $1,000)