National Event Coordinators is contemplating the acquisition of a new tent that will be used for major outdoor events.The purchase price is $147,000.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.The tent will be worthless after four years.The tent can be leased for four years at $42,500 a year.The firm can borrow money at 7.5 percent and has a 34 percent tax rate.What is the net advantage to leasing?
A)$1,789
B)$1,862
C)$1,922
D)$2,087
E)$2,127

Question

Quizplus · Accepted Answer

After-tax lease payment = $42,500 (1 - 0.34) = $28,050Lost depreciation tax shield year 1 = $147,000 × 0.3333 × 0.34 = $16,658.33Lost depreciation tax shield year 2 = $147,000 × 0.4444 × 0.34 = $22,211.11Lost depreciation tax shield year 3 = $147,000 × 0.1482 × 0.34 = $7,407.04Lost depreciation tax shield year 4 = $147,000 × 0.0741 × 0.34 = $3,703.52After-tax discount rate = 0.075 (1 - 0.34) = 0.04983

National Event Coordinators Is Contemplating the Acquisition of a New