The S Company is considering the acquisition of a new processor used in its operation. The processor has an installed cost of $46,000 and is expected to have a useful life of 5 years. If purchased, the firm would borrow the entire $46,000 at an interest rate of 9%. The processor would be depreciated over a 5 year ACRS life to a zero book value, but it is estimated that it could be sold for $5,000 after 5 years. A capital budgeting analysis indicates that purchase of the processor has a positive NPV. Alternatively, S Company can lease the processor for the 5 year period for an annual lease payment of $14,500. If the processor is leased, annual operating expenses of $2,500 will be paid by the lessor. If the equipment is purchased, the firm will incur this expense. S Company’s cost of capital is 12% and its marginal tax rate is 35%.
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