Intel Inc is looking to acquire a new equipment for a project that will last for eight years. The after-tax required rate of return of the project is 12% per annum. Intel can borrow at a before-tax interest rate of 10% per annum and buy the equipment outright or lease the equipment from ABC’s Leasing. The applicable corporate tax rate is 28% and the equipment will be fully depreciated to zero over the eight years using a straight-line method. Intel evaluated the lease and decided to buy the equipment by borrowing since the NPV of lease versus borrow-to-buy analysis was estimated to be -$10,000. However, subsequently Intel realised that in the analysis the purchase cost of the equipment had been under-estimated by $20,000, and also the salvage value of the equipment (at the end of the lease term) had been under-estimated by $7,000. Given the correct purchase price and salvage value, which of the following statements now accurately describes Intel’s decision regarding the acquisition of this equipment? -The equipment should now be leased since the additional cost saved is higher than the negative NPV calculated, i.e., NPV of lease versus borrow-to-buy is now $10,000. -None of the other answers is correct. -It is now indifferent between lease and borrow-to-buy. -The equipment should be leased since the NPV is now $3,000 after the inclusion of additional purchase cost and salvage value. -The equipment should still be purchased by borrowing since the NPV of lease versus borrow-to-buy is now -$2,666.20.
Intel Inc is looking to acquire a new equipment for a project that will last for eight years. The after-tax required
However, subsequently Intel realised that in the analysis the purchase cost of the equipment had been under-estimated by $20,000, and also the salvage value of the equipment (at the end of the lease term) had been under-estimated by $7,000. Given the correct purchase price and salvage value, which of the following statements now accurately describes Intel’s decision regarding the acquisition of this equipment?
-The equipment should now be leased since the additional cost saved is higher than the negative NPV calculated, i.e., NPV of lease versus borrow-to-buy is now $10,000.
-None of the other answers is correct.
-It is now indifferent between lease and borrow-to-buy.
-The equipment should be leased since the NPV is now $3,000 after the inclusion of additional purchase cost and salvage value.
-The equipment should still be purchased by borrowing since the NPV of lease versus borrow-to-buy is now -$2,666.20.
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