Mishthosi Company Case Study Help Analysis With Solution

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The Mishthosi Company is considering the acquisition of a machine that costs $50,000 if bought today. The company can buy or lease the machine. If it buys the machine, the machine would be depreci- ated as a 3-year MACRS asset and is expected to have a salvage value of $1,000 at the end of the 5-year useful life. If leased, the lease payments are $12,000 each year for four years, payable at the beginning of each year. The marginal tax rate of Mishthosi is 30% and its cost of capital is 10%. Assume that the lease is a net lease, that any tax benefits are realized in the year of the expense, and that there is no investment tax credit.
MACRS rates of depreciation on a 3-year asset are:

Year Rate

1 33.33%
2 44.45%
3 14.81%
4 7.41%

1. Calculate the depreciation for each year in the case of the pur- chase of this machine.
2. Calculate the direct cash flows from leasing initially and for each of the five years.

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3. Calculate the adjusted discount rate.
4. Calculate the value of the lease.

Product Code: Fin-ch-339

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