Maxine's is considering either purchasing or leasing a $600,000 piece of specialized equipment. The equipment has a life of 5 years, belongs in a 30% CCA class, and will have no residual value. The cost of debt is 12% for this purchase. A lease on the equipment for 5 years is priced at $150,000 a year. Maxine's corporate tax rate is 34%. The lessor has a tax rate of 35%.

What is the net advantage to leasing for Maxine?
A) $17,044
B) $17,190
C) $17,320
D) $17,400
E) $17,690

Question

Maxine's is considering either purchasing or leasing a $600,000 piece of specialized equipment. The equipment has a life of 5 years, belongs in a 30% CCA class, and will have no residual value. The cost of debt is 12% for this purchase. A lease on the equipment for 5 years is priced at $150,000 a year. Maxine's corporate tax rate is 34%. The lessor has a tax rate of 35%.

What is the net advantage to leasing for Maxine?

What is the net advantage to leasing for Maxine?
A) $17,044
B) $17,190
C) $17,320
D) $17,400
E) $17,690

Quizplus · Accepted Answer

The net advantage to leasing (NAL) is calculated by comparing the after-tax cost of leasing to the after-tax cost of owning. The NAL is the difference between the present value of leasing costs and the present value of owning costs. After calculating the tax shield benefits and costs for both options, the NAL is found to be $17,044.

Maxine's Is Considering Either Purchasing or Leasing a $600,000 Piece