Boulder Inc. is considering the acquisition of a new machine, either through a lease or by purchasing the asset.
The asset will cost $200,000 on January 1, Year 1, and will have a scrap value of $25,000 at the end of Year 2. Operating inflows are $150,000 for two years. The tax rate is 30 percent and the company's weighted average cost of capital is 9 percent. The machine is fully depreciated on a straight-line basis over two years for both book and tax purposes. Boulder's financing options for the asset are:
Relevant PV factors include the following:
PV of ordinary annuity at 9% 1.759 PV of annuity due at 7% 1.935
PV of $1 at 7% Year 1 0.935 Year 2 0.873
Required 1. Determine the NPV under both the options.
Required 2. Which option is more beneficial?
Please share your detailed calculation.
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HIRA SINGH
Accountant
UTTAM NAGAR
India
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