Merkon Inc. must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent. The purchased asset would be 3-year recovery property that Merkon could use for four years, after which the asset would have no salvage value. Assuming a 21% tax rate, an 8% discount rate, and no Section 179 deduction or bonus depreciation, which of the following statements is true? Use Appendix A, Table 7-2. (Round discount factor(s) to 3 decimal places.)
A) Merkon's after-tax cost of the purchase is $8,517 less than the after-tax cost of the lease.
B) Merkon's after-tax cost of the lease is $1,374 less than the after-tax cost of the purchase.
C) Merkon's after-tax cost of the purchase is $8,517 more than the after-tax cost of the lease.
D) None of these choices are correct.

Question

Quizplus · Accepted Answer

The after-tax cost of purchasing the asset is lower than leasing it due to the depreciation tax shield, making the purchase $8,517 less expensive than leasing.