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    A fishing company is considering the purchase of a new boat. The company is presently financed by a mix of 70% owners equity ad 30% debt, the after tax cost of capital is 12%. Should they buy it?

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    A fishing company is considering the purchase of a new boat. The company is presently financed by a mix of 70% owners equity ad 30% debt, the after tax cost of capital is 12%. The details are as follows:

    (see chart in attached file)

    Cost of boat $20000
    Useful life 4 years
    Salvage value 4000
    Depreciation method, down to zero book value Straight line
    Annual cash savings from boat, before tax and depreciation $10000
    Rate of interest on a 4 year term loan 10% per annum
    Marginal tax rate 47%
    Annual lease rentals (4 years) payable at the beginning of each year $6000
    Residual lease value $7000
    Annual operating expenses paid by lessor $1000

    (i) evaluate whether or not the truck acquisition is justified as an investment project.
    (ii) Should the company lease the boat

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    https://brainmass.com/business/leasing/leasing-versus-purchasing-78909

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    ** Please see the attached file for the complete solution response **

    A fishing company are considering the purchase of a new boat. The company is presently financed by a mix of 70% owners equity ad 30% debt, the after tax cost of capital is 12%. The details are as follows:
    Cost of boat $20000
    Useful life 4 years
    Salvage value 4000
    Depreciation method, down to zero book value Straight line
    Annual cash savings from boat, before tax and depreciation $10000
    Rate of interest on a 4 year term loan 10% per ...

    Solution Summary

    In this detailed solution the computation and rationale explained for the given finance problem.

    $2.19

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