LSU-BADM 7090-Mancini Bakery

LSU-BADM 7090-Mancini Bakery in $6 onlyMancini Bakery

Mancini Bakery would like to expand its business and is trying to determine whether to purchase or lease new equipment or whether to expand at all. If the expansion takes place, it will only last for five years at which time the Bakery will close down the expansion project. The new equipment for the expansion has an invoice price of $300,000 and that price includes delivery and modifications for use. The funds needed could be borrowed from the bank through a 5-year amortized loan at a 6.5% interest rate, with payments to be made at the end of each year. The bank also offers a maintenance contract on the equipment at an annual fee of $15,000, payable at the beginning of each year of operation. The equipment falls in the MACRS 7-year class (rates of 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, and 4.96%, respectively in years 1 through 8), and Mancini’s marginal federal-plus-state tax rate is 25%. The expansion is expected to increase Mancini’s revenue by $370,000 annually with an accompanying increase in the Cost of Goods Sold of $275,000 each year. Determine whether Mancini should adopt the expansion project, and if so, the most they would pay annually in lease payments to make the project more attractive than owning…

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