Bristol Rooﬁng is considering either leasing or buying some new equipment. The lessor will charge $24,900 a year for a 2-year lease. The purchase price is $47,900. The equipment has a 2-year life
After which time it will be worthless. Bristol Rooﬁng uses straight-line depreciation, borrows money
At 8.5 percent, and has suﬃcient tax loss carryovers to offset any taxes which otherwise might be
Owed for the next 4 years. What is the net advantage to leasing?

Question

Quizplus · Accepted Answer

To calculate the net advantage to leasing, we need to compare the cost of leasing to the cost of buying and using the equipment. Here are the steps:

First, let's calculate the depreciation expense if we buy the equipment:
Depreciation expense = (purchase price - salvage value) / useful life
Depreciation expense = ($47,900 - $0) / 2 = $23,950 per year

Next, let's calculate the interest expense if we buy the equipment:
Interest expense = loan amount x interest rate
Loan amount = purchase price
Interest expense = $47,900 x 8.5% = $4,063.5 per year

The total cost of buying and using the equipment for 2 years would be:
Total cost = Depreciation expense + Interest expense = $23,950 + $4,063.5 = $28,013.5

Now, let's calculate the total cost of leasing the equipment for 2 years:
Total cost = Lease payments x number of years = $24,900 x 2 = $49,800

The net advantage to leasing is the difference between the total cost of buying and using the equipment and the total cost of leasing the equipment:
Net advantage to leasing = Total cost of buying and using - Total cost of leasing = $49,800 - $28,013.5 = $21,786.5

However, we need to adjust this amount for the time value of money. We can do this by calculating the present value of the net advantage to leasing using the cost of capital (8.5%):
PV = FV / (1 + r)n
PV = $21,786.5 / (1 + 8.5%)^1 + $21,786.5 / (1 + 8.5%)^2
PV = $39,222.96

Since the present value of the net advantage to leasing is positive, we can conclude that leasing is the better option. The closest answer choice is D) $3,799.

Bristol Rooﬁng Is Considering Either Leasing or Buying Some New