An asset is to be purchased for $25,000. The asset is expected to provide revenue of $10,000 a year and have operating costs of $2,500 a year. The asset is considered to be a seven year MACRS property. The company is planning to sell theasset at the end of year 5 for $5,000. Given that the company’s marginal tax rate is 30% and that it has a MARR of 10% for any project undertaken, answer the following questions:
(a) What is the net cash flow for each year, given that the asset is purchased with borrowed funds at an interest rate of 12%, with repayment in five equal endof year payments?
(b) What is the net cash flow for each year, given that the asset is leased at a rate of $3,500 a year (a financial lease)?
(c) Which method (if either) should be used to obtain the new asset?