Medarex is considering the lease of an electronic welder costing $210,000 from Key Leasing. The period of the lease will be 6 years. The welder will be depreciated under MACRS rules for a 5-year class asset. Medarex's marginal tax rate is 40%. Annual beginning-of-the-year lease payments will be $50,000. Estimated salvage value is zero. Assuming Medarex's after-tax cost of borrowing is 15%, compute the net advantage to leasing. (Problem requires MACRS tables.)

Question

Quizplus · Accepted Answer

The net advantage to leasing (NAL) calculation involves comparing the cost of leasing to the cost of buying and financing the asset. The calculation takes into account the tax benefits from depreciation and interest (if the asset were bought and financed), the lease payments, and the tax shield from those lease payments. Given the information, the correct answer involves calculating the present value of the lease payments, the tax benefits from depreciation, and comparing these to the cost of purchasing the asset. The specific calculation requires detailed financial analysis, including the application of MACRS depreciation rates, the calculation of tax shields, and the discounting of future cash flows at the after-tax cost of borrowing. The correct answer (D) $21,427, suggests that leasing offers a net advantage of $21,427 over purchasing and financing the asset, considering the tax benefits and the cost of capital.

Medarex Is Considering the Lease of an Electronic Welder Costing