Smith Meats is trying to decide whether to lease or buy some new equipment. The equipment costs $62,000, has a 3-year life, and will be worthless after the 3 years. The pre-tax cost of borrowed
Funds is 9 percent and the tax rate is 35 percent. The equipment can be leased for $22,500 a year.
What is the net advantage to leasing assuming the ﬁrm is allowed to use straight-line method to
Account for depreciation?
A) $2,970
B) $3,272
C) $3,308
D) $3,369
E) $3,411

Question

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The Answer of Smith Meats is trying to decide whether to lease or buy some new equipment. The equipment costs $62,000, has a 3-year life, and will be worthless after the 3 years. The pre-tax cost of borrowed
Funds is 9 percent and the tax rate is 35 percent. The equipment can be leased for $22,500 a year.
What is the net advantage to leasing assuming the ﬁrm is allowed to use straight-line method to
Account for depreciation?
A) $2,970
B) $3,272
C) $3,308
D) $3,369
E) $3,411

Smith Meats Is Trying to Decide Whether to Lease or Buy