Question

A. During the year, a farmer pays $1000 principal and $500 interest on a tractor loan. His annual depreciation expense is $4000. His operating expenses including fuel, oil, and repairs total $500 for the year (ignore fuel tax credits). His marginal tax rate is 25%. What is his after-tax cost of using the tractor for the year?

B. If the farmer leased the tractor for the year for $1200, how much
would his after-tax cost of using the tractor be?

Answer 1

Question - a ........ After tax cost of using tractor = 3750

Repayment of principle should not be considered as cost. But interest paid on principle is a cost.

Interest	500
Depreciation	4000
Operating expenses	500
Total cost before tax	5000
(-) Tax saving @ 25%	1250
After tax cost of using tractor	3750

Question - b.............. After tax cost of using the tractor = 1275

If the tractor is leased .......... there will not be any interest expenses and depreciation expenses. But Operating expenses will be incurred even in the case of lease. Lease rent is an additional expenses here.

Operating expenses	500
Lease Rent	1200
Total cost before tax	1700
(-) Tax saving @ 25%	425
After tax cost of using tractor	1275