Problem 25-6 on Purchase versus Lease based on Chapter 25 Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000 per year for 7 years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of the 7 years.) a.What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease? b.What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease? Problem 25-7 on Purchase versus Lease based on Chapter 25 Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over 5 years, after which it will be worthless. If leased, the annual lease payments will be $55,000 per year for 5 years. Assume Riverton’s borrowing cost is 8%, its tax rate is 35%, and the lease qualifies as a true tax lease.
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