Bob's Pizza is considering either leasing or buying a new oven.The lease payments would be $10,200 a year for 3 years.The purchase price is $29,000.The equipment has a 3-year life and then is expected to have a resale value of $3,100.Bob's Pizza uses straight-line depreciation,borrows money at 10 percent,and has a 32 percent tax rate.What is the net advantage to leasing?

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Quizplus · Accepted Answer

Aftertax lease payment = $10,200 (1 - 0.32) = $6,936Lost depreciation tax shield = ($29,000/3) (0.32) = $3,093.33Aftertax salvage value = $3,100 (1 - 0.32) = $2,108Discount rate = 0.10 (1 - 0.32) = 0.068

Bob's Pizza Is Considering Either Leasing or Buying a New