Steven's Auto is trying to decide whether to lease or buy some new equipment costing $23,000 that has a life of three years, after which it will be worthless. The aftertax discount rate is 5.8 percent. Assume the annual depreciation tax shield is $1,610 and the aftertax annual lease payment is $6,500. What is the net advantage to leasing?
A) $1,241
B) −$397
C) $1,585
D) $1,315
E) −$863

Question

Quizplus · Accepted Answer

The net advantage to leasing is the present value of the tax savings from leasing minus the present value of the lease payments. The present value of the tax savings is $1,610 x (1 - 0.058)^3 / 0.058 = $4,138. The present value of the lease payments is $6,500 x (1 - 1 / (1 + 0.058)^3) / 0.058 = $17,453. Therefore, the net advantage to leasing is $4,138 - $17,453 = -$13,315.

Steven's Auto Is Trying to Decide Whether to Lease or Buy