Business Finance Homework Help

You work for a sanitary garment company. Your firm needs to decide if it is more convenient to lease or to buy a sewing machine to meet the additional demand of medical gowns and face masks. The purchase price of the machine is £95,000 and if purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. On the other hand, if you lease the sewing machine, annual payments will be £16,700, with the first of four payments due today. The firm’s pre-tax borrowing cost is 8% and the effective tax rate is 24%.

I. If this is a true tax lease, decide if the firm should buy or lease the sewing machine. Show all your calculations (including the lease equivalent loan) and explain your decision.

II. If this were a non-tax lease, should the firm buy or lease the sewing machine?

Show all your calculations and explain your decision.