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Problem 18-01 : Reynolds Construction needs a piece of equipment that costs $200. Reynolds can either lease the equipment or borrow $200 from a local...
Problem 18-01 : Reynolds Construction needs a piece of equipment that costs $200. Reynolds caneither lease the equipment or borrow $200 from a local bank and buy the equipment.If the equipment is leased, the lease would not have to be capitalized. Reynolds’s balancesheet prior to the acquisition of the equipment is as follows:Current assets $300 Debt $400Net fixed assets 500 Equity 400Total assets $800 Total claims $800a(18–2)Lease versus BuyConsider the data in Problem 18-1. Assume that Reynolds’s tax rate is 40% and thatthe equipment’s depreciation would be $100 per year. If the company leased the asseton a 2-year lease, the payment would be $110 at the beginning of each year. IfReynolds borrowed and bought, the bank would charge 10% interest on the loan.In either case, the equipment is worth nothing after 2 years and will be discarded.Should Reynolds lease or buy the equipment? Please fill out form under Chapter 18-Problem 2. There is a follow up explanation that will also need to be filled. Provide all documentation as to how the answer came about.
