The Discount Store is trying to decide whether to lease or buy some new equipment. The equipment costs $42,000, has a 4-year life, and will be worthless after the 4 years. The cost of borrowed funds is 9.5 percent and the tax rate is 34 percent. The equipment can be leased for $11,400 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 savings from the lease payment. The tax savings are calculated as the lease payment times the tax rate. So, the after-tax lease payment = Lease payment - (Lease payment * Tax rate) = $11,400 - ($11,400 * 34%) = $11,400 - $3,876 = $7,524.

The Discount Store Is Trying to Decide Whether to Lease