Aldo, Inc. is trying to decide whether to lease or buy some new equipment. The equipment costs $59,000, has a 3-year life, and belongs in a 25 percent CCA class. The equipment will be worthless after the 3 years and will have to be replaced. The company has a tax rate of 34 percent and a cost of borrowed funds of 10 percent. The equipment can be leased for $22,000 a year. What is the amount of the after-tax lease payment?

Question

Quizplus · Accepted Answer

The after-tax lease payment is calculated as the lease payment minus the tax shield on the lease payment. The tax shield is the lease payment times the tax rate. So, the after-tax lease payment is $22,000 - ($22,000 * 34%) = $22,000 - $7,480 = $14,520.

Aldo, Inc Is Trying to Decide Whether to Lease or Buy