Encyclopedia Britannica

Running head: CORPORATE FINANCE
Corporate Finance
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ADVANCED CORPORATE FINANCE1
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
Bibliography....................................................................................................................................4

ADVANCED CORPORATE FINANCE2
Question 1
In order to well analyze whether the project should be taken on a lease or on a purchase
consideration it is important to determine the present value of all costs and benefits that the
company would be getting in each of the analyzed case. In the case of asset purchase the
company initially would be paying around $100,000 for the machinery and the same would be
depreciated using the straight line method. The company in the case of asset purchase would be
getting a depreciation tax shield benefit that would be allowing the company to earn a cash
inflow benefit. The discount rate that has been taken into consideration for the purpose of
discounting or getting the amount of cash flows that the company would be getting in the five
year time frame. The discount rate that has been taken into consideration on a pre-tax basis
would be around 10% and the taxation effect that has been taken into consideration would be
30% which makes the post-tax basis of discount rate to be around 7%.
Depreciation tax shield would be treated as a cash inflows which would be around $6,000
for a sum of five-years. The total value that would be paid in the case of asset purchase
consideration would be around $75,398 that would be accounting for all the cash inflows and
cash outflows that would be seen in asset purchase. On the other hand, in the case of finance
lease the value that would be paid in this case on a present value basis would be around
$140,390. Thus it is recommended that the asset should be taken into a purchase consideration
rather on a finance lease because of the costs that is involved in purchase consideration is
comparatively less.