Engro Incorporation wants to evaluate an acquisition of an equipment worth $200,000. Its marginal tax rate is 40 percent. If purchased, the depreciation of equipment will take place at straight line method. The salvage value of the equipment is assumed to be $20,000 at the end of its useful life of 10 years. If the equipment is purchased, Engro will finance the asset through borrowing from bank at annual before tax cost of 10%. further, if Engro decides to purchase the equipment, it will incur $1000 as annual maintenance expense each year. These expenses would not be incurred if the computer is leased. If leased, Engro can have the equipment at $28000 pre-tax rate per year, which is to be paid at the beginning of each year. Company’s weighted average after tax cost of capital is 12 percent. Compute the net advantage to leasing (8 marks)
What alternative, leasing or owning, should be chosen (2 mark)