In: Finance
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?
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.