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 the lessor?
A) -$18,568
B) -$17,640
C) -$17,488
D) -$16,813
E) $16,619

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 the lessor?

What is the net advantage to leasing for the lessor?
A) -$18,568
B) -$17,640
C) -$17,488
D) -$16,813
E) $16,619

Quizplus · Accepted Answer

The net advantage to leasing for the lessor is calculated by comparing the after-tax cash flows from leasing versus purchasing. The lessor's tax rate and the lease payments are used to determine the after-tax lease income, and the cost of debt is used to calculate the present value of the tax shield from depreciation. The correct calculation results in a net advantage of -$17,488.

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