Fargo North is considering the purchase of some new equipment costing $112,000. This equipment has a 5-year life after which it will be worthless. The firm uses straight-line depreciation and borrows funds at 9 percent interest. The company's tax rate is 33 percent. The firm also has the option of leasing the equipment. What is the amount of the break-even lease payment?

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Quizplus · Accepted Answer

Depreciation tax shield = ($112,000/5) (0.33) = $7,392Discount rate = 0.09(1 - 0.33) = 0.0603$112,000 = C(PVIFA_{6.03%, 5}); C = $26,610.10Break-even lease payment = ($26,610.10 - $7,392)/(1 - 0.33) = $28,684

Fargo North Is Considering the Purchase of Some New Equipment