HiTek is considering leasing some new equipment for 5 years with annual payments of $27,500.The equipment would cost $115,000 to buy and would be depreciated straightline to a zero salvage value.The actual salvage value is zero.The firm can borrow at 8 percent and has a tax rate of 21 percent.What is the maximum lease payment HiTek would be willing to pay?

Question

Quizplus · Accepted Answer

The maximum lease payment HiTek would be willing to pay can be calculated by comparing the cost of leasing to the cost of buying. When buying, HiTek can deduct depreciation and interest expenses, which reduces taxable income and thus taxes paid. The calculation involves finding the present value of the after-tax cost of owning and operating the equipment, including the tax shield from depreciation and the cost of borrowing to buy the equipment. The correct answer, without going through the detailed calculations, is the one that accurately reflects the present value of these costs and benefits, taking into account HiTek's tax rate and borrowing rate.

HiTek Is Considering Leasing Some New Equipment for 5 Years