Fargo North is considering the purchase of some new equipment costing $118,000.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 = ($118,000/5) (0.33) = $7,788Discount rate = 0.09(1 - 0.33) = 0.0603$118,000 = C(PVIFA_{6.03%, 5}); C = $28,035.64Break-even lease payment = ($28,035.64 - $7,788)/(1 - 0.33) = $30,220

Fargo North Is Considering the Purchase of Some New Equipment