Precision Tool is trying to decide whether to lease or buy some new equipment for its tool and die operations.The equipment costs $1.2 million has a 7-year life,and will be worthless after the 7 years.The pre-tax cost of borrowed funds is 8 percent and the tax rate is 32 percent.The equipment can be leased for $242,500 a year.What is the net advantage to leasing?
A)-$51,566
B)-$34,211
C)$37,549
D)$56,828
E)$79,664

Question

Quizplus · Accepted Answer

Aftertax lease payment = $242,500 (1 - 0.32) = $164,900Annual depreciation tax shield = ($1,200,000/7) (0.32) = $54,857.14Aftertax discount rate = 0.08 (1 - 0.32) = 5.44 percentNAL = $1,200,000 - ($164,900 + $54,857.14) (PVIFA_{5.44%, 7}) = -$51,566

Precision Tool Is Trying to Decide Whether to Lease or Buy