Answered: Next Corporation needs a piece of…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter19: Lease Financing

Section: Chapter Questions

Problem 1P: Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the...

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Next Corporation needs a piece of equipment that costs $270 million. Next can either lease the equipment or borrow $270 million from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that Next’s tax rate is 35% and that the equipment’s depreciation would be $90 million per year. If the company leased the asset on a 3-year lease, the payment would be $105 million at the beginning of each year. If Next borrowed and bought, the bank would charge 12% interest on the loan. In either case, the equipment is worth nothing after 3 years and will be discarded. Should Next lease or buy the equipment?

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