Answer Happy

Intel Inc is looking to acquire a new equipment for a project
that will last for eight years. The after-tax required rate of
return of the project is 12% per annum. Intel can borrow at a
before-tax interest rate of 10% per annum and buy the equipment
outright or lease the equipment from ABC’s Leasing. The applicable
corporate tax rate is 28% and the equipment will be fully
depreciated to zero over the eight years using a straight-line
method. Intel evaluated the lease and decided to buy the equipment
by borrowing since the NPV of lease versus borrow-to-buy analysis
was estimated to be -$10,000.
However, subsequently Intel realised that in the analysis the
purchase cost of the equipment had been under-estimated by $20,000,
and also the salvage value of the equipment (at the end of the
lease term) had been under-estimated by $7,000. Given the correct
purchase price and salvage value, which of the following
statements now accurately describes Intel’s
decision regarding the acquisition of this equipment?
It is now indifferent between lease and borrow-to-buy.
None of the other answers is correct.
The equipment should now be leased since the additional cost
saved is higher than the negative NPV calculated, i.e., NPV of
lease versus borrow-to-buy is now $10,000.
The equipment should be leased since the NPV is now $3,000 after
the inclusion of additional purchase cost and salvage value.
The equipment should still be purchased by borrowing since the
NPV of lease versus borrow-to-buy is now -$2,666.20.