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Precision Tool is trying to decide whether to lease or buy some new equipment for its...

Precision Tool is trying to decide whether to lease or buy some new equipment for its tool and die operations. The equipment costs $55,000, has a 3-year life and will be worthless after the 3 years. The pre-tax cost of borrowed funds is 6 percent and the tax rate is 33 percent. The equipment can be leased for $17,500 a year. What is the net advantage to leasing?

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Expert Solution

Net advantage to leasing $5,691.47

WORKINGS

Buy Lease
Year Initial cost Tax shield on depreciation Net Cash flow Lease*(1-tax)
0 -55000 -55000
1 6050 6050 -11725
2 6050 6050 -11725
3 6050 6050 -11725
NPV ($38,217.07) ($32,525.60)

Depreciation is assumed straight line

Cash flows are discounted with the post tax cost of borrowed funds.

jeff jeffy answered 5 months ago
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