Solution on CORPFIN 3500 Corporate Finance Theory of Engineering One Limited
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Assignment Details:
- Referencing Styles: Not Selected
- Words: 1000
- Course Code: CORPFIN 3500
- Course Title: Corporate Finance Theory
- University: The University of Adelaide
- Country: AU
Question One
Engineering One Limited will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Engineering One Limited can lease the fabricator for $130,000 per year for seven years payable at the beginning of the period. Engineering One Limited has a tax rate of 35% and has a borrowing rate of 7% pre-tax.
Required:
- What are the cash flow consequences of leasing the fabricator?
- What are the cash flow consequences of buying the fabricator?
- What are the incremental cash flows of leasing versus buying the fabricator?
- Briefly discuss what would be the balance sheet consequences if this were classified as an operating lease? As a finance lease?