Bob's Pizza is considering either leasing or buying a new oven. The lease payments would be $10,400 a year for 3 years. The purchase price is $29,000. The equipment has a 3-year life and then is expected to have a resale value of $3,500. Bob's Pizza uses straight-line depreciation, borrows money at 10 percent, and has a 32 percent tax rate. What is the net advantage to leasing?

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Quizplus · Accepted Answer

Aftertax lease payment = $10,400 (1 - 0.32) = $7,072Lost depreciation tax shield = ($29,000/3) (0.32) = $3,093.33Aftertax salvage value = $3,500 (1 - 0.32) = $2,380Discount rate = 0.10 (1 - 0.32) = 0.068

Bob's Pizza Is Considering Either Leasing or Buying a New