Deep Mining,Inc.,is contemplating the acquisition of some new equipment for controlling coal dust that costs $174,000.The firm uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.After that time,the equipment will be worthless.The equipment can be leased for $53,100 a year for 4 years.The firm can borrow money at 11.5 percent and has a 36 percent tax rate.What is the net advantage to leasing?
A)$5,225
B)$5,607
C)$6,611
D)$6,847
E)$6,950

Question

Quizplus · Accepted Answer

After-tax lease payment = $53,100 (1 - 0.36) = $33,984Lost depreciation tax shield year 1 = $174,000 × 0.3333 × 0.36 = $20,877.91Lost depreciation tax shield year 2 = $174,000 × 0.4444 × 0.36 = $27,837.22Lost depreciation tax shield year 3 = $174,000 × 0.1482 × 0.36 = $9,283.25Lost depreciation tax shield year 4 = $174,000 × 0.0741 × 0.36 = $4,641.62Aftertax discount rate = 0.115 (1 - 0.36) = 0.0736