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Riverton Mining plans to purchase or lease $ 300,000 worth of excavation equipment. If? purchased, the...

Riverton Mining plans to purchase or lease $ 300,000 worth of excavation equipment. If? purchased, the equipment will be depreciated on a? straight-line basis over five? years, after which it will be worthless. If? leased, the annual lease payments will be $ 70,301 per year for five years. Assume? Riverton's borrowing cost is 8.5 % ?, its tax rate is 35 % ?, and the lease qualifies as a true tax lease.

a. If Riverton purchases the? equipment, what is the amount of the? lease-equivalent loan?

b. Is Riverton better off leasing the equipment or financing the purchase using the? lease-equivalent loan?

c. What is the effective? after-tax lease borrowing? rate? How does this compare to? Riverton's actual? after-tax borrowing? rate? a. If Riverton purchases the? equipment, what is the amount of the? lease-equivalent loan? The amount of the? lease-equivalent loan is ?$nothing . ?(Round to the nearest? dollar.) b. Is Riverton better off leasing the equipment or financing the purchase using the? lease-equivalent loan? ? (Select the best choice? below.) A. Riverton is better off financing the purchase using the? lease-equivalent loan. B. Both alternatives are equally attractive. C. Riverton is better off leasing the equipment. D. Riverton should only invest with retained earnings. c. What is the effective? after-tax lease borrowing? rate? How does this compare to? Riverton's actual? after-tax borrowing? rate? The effective? after-tax lease borrowing rate is nothing ?%. ? (Round to two decimal? places.) ?(Select from the? drop-down menu.) The effective? after-tax lease borrowing rate is ? higher lower than? Riverton's actual? after-tax borrowing rate.

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Answer #1

A) If equipment is purchased

Particulars 0 1 2 3 4 5 Total
Cost of equipment 300000
Depreciation 60000 60000 60000 60000 60000
Tax savings @ 35% 21000 21000 21000 21000 21000
Cash flow -300000 21000 21000 21000 21000 21000
PVIF @ 8.5% 1 0.9217 0.8495 0.7829 0.7216 0.6650
Present value -300000 19354.84 17838.56 16441.07 15153.06 13965.95 -217247
PVIF @ 8.5% 3.9406
EAUC -55130.3

B) if equipment is taken on lease

Particulars 1 2 3 4 5 Total
Cost of equipment
Lease -70301 -70301 -70301 -70301 -70301
Tax savings @ 35% 24605.35 24605.35 24605.35 24605.35 24605.35
Cash flow -45695.7 -45695.7 -45695.7 -45695.7 -45695.7
PVIF @ 8.5% 0.9217 0.8495 0.7829 0.7216 0.6650
Present value -42115.8 -38816.4 -35775.5 -32972.8 -30389.7 -180070

Thus it would be better it equipment is taken on lease

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