Fireplaces and More is considering the purchase of a delivery truck costing $27,000.The truck will be used for 5 years and then it will be worthless.The financing rate for the purchase is 7.5 percent and the corporate tax rate is 32 percent.The firm uses straight-line depreciation.What is the break-even lease payment amount?
A)$6,655
B)$7,148
C)$7,546
D)$8,038
E)$8,254

Question

Quizplus · Accepted Answer

Depreciation tax shield = ($27,000/5) (0.32) = $1,728Discount rate = 0.075 (1 - 0.32) = 5.10 percent$27,000 = C(PVIFA_{5.10%, 5}); C = $6,253.57Break-even lease payment = ($6,253.57 - $1,728)/(1 - 0.32) = $6,655

Fireplaces and More Is Considering the Purchase of a Delivery