Whistle Farms is considering either leasing or buying some new equipment. The lessor will charge $16,000 a year for a 3-year lease. The purchase price is $46,000. The equipment has a 3-year life
After which time it will be worthless. Whistle Farms uses straight-line depreciation, has a 35 percent
Tax rate, borrows money at 9 percent, and has suﬃcient tax loss carryovers to offset any potential
Taxable income the ﬁrm might have over the next ﬁve years. What is the net advantage to leasing?

Question

Quizplus · Accepted Answer

The net advantage to leasing is calculated by comparing the after-tax cost of leasing with the after-tax cost of buying. The depreciation tax shield and the interest cost of borrowing to buy the equipment are considered. The net advantage to leasing is $5,499.

Whistle Farms Is Considering Either Leasing or Buying Some New