Cool Treats is considering either leasing or buying a new freezer unit. The lessor will charge...

Cool Treats is considering either leasing or buying a new freezer unit. The lessor will charge $11,900 a year for a two-year lease. The purchase price is $30,900. The freezer has a two-year life after which time it is expected to have a resale value of $11,500. Cool Treats uses straight-line depreciation, borrows money at 7.5 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years. What is the net advantage to leasing?

-$167.21

$238.41

$257.83

-$270.10

-$418.55

Expert Solution

Solution :

The net advantage to leasing is = - $ 418.5506

= - $ 418.55 ( when rounded off to two decimal places )

The solution is Option 5 = - $ 418.55

Note :

Since the company has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years (and no tax rate has been mentioned.), the solution has been arrived at without considering the tax expenses that arise on making a lease payment and the tax shield on depreciation arising on purchase of the new freezer unit.

Similarly, the pre tax discount rate = the post tax discount rate, since taxes are not being considered.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 1 year ago

The firm is considering either leasing or buying new $19,000 equipment. The lessor will charge $12,000...

The firm is considering either leasing or buying new $19,000 equipment. The lessor will charge $12,000 a year for a two-year lease. The equipment has a two-year life after which time it is expected to have a zero resale value. The firm uses straight-line depreciation, borrows money at 7% pre-tax, and has a tax rate of 21%. What is the net advantage to leasing? A) −$167 B) −$319 C) −$720 D) $1254 E) $720

Green Valley Farms is considering either leasing or buying some new farm equipment. The lessor will...

Green Valley Farms is considering either leasing or buying some new farm equipment. The lessor will charge $23,000 a year lease. The purchase price is $63,000. The equipment has a 3-year life after which time it will be worthless. Green Valley Farms uses straight-line depreciation, has a 32 percent tax rate, borrows money at 9 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years. What is the...

Icehouse Inc. is considering leasing a freezer to another firm. The freezer costs $85,000.

Icehouse Inc. is considering leasing a freezer to another firm. The freezer costs $85,000. The 5 year lease requires 5 beginning of the year payments. The leasing company is depreciating the freezer on a straight-line basis over the five years. The after-tax salvage value is $35,000. Icehouse's required rate of return is 18% Assume a marginal tax rate of 40%. Round to the nearest $ What is the present value of the after-tax salvage value? What is the present value of the depreciation...

You need a new computer. You are considering either leasing or putting the purchase on your...

You need a new computer. You are considering either leasing or putting the purchase on your credit card. The terms of the lease agreement are $250 down and a monthly payment of $100 for 12 months, with an option to purchase for $300 at the end of the lease period. If you buy the computer now and put the purchase on your credit card, your monthly payment would be $130, with the credit card interest rate 18% compounded monthly. What...

You are considering either buying a computer or leasing one $725 per year (paid at the beginning of the year) for 3 years.

You are considering either buying a computer or leasing one $725 per year (paid at the beginning of the year) for 3 years. The current value of the computer is $2,000. You don’t have that much cash but you can get a loan for 8%. Which would cost less, buying or leasing? (Must show a solution to receive full credit.)

In considering leasing versus buying decisions , adopting a new machines saves annual operation cost by...

In considering leasing versus buying decisions , adopting a new machines saves annual operation cost by $5,000 if cost of debt is 8%, corporate tax is 40%, Then tha after tax operating saving is $________(please enter whole number without comma)

Apricot Computers is considering replacing its material handling system and either purchasing or leasing a new...

Apricot Computers is considering replacing its material handling system and either purchasing or leasing a new system. The old system has an annual operating and maintenance cost of $31,000, a remaining life of 8 years, and an estimated salvage value of $5,800 at that time. A new system can be purchased for $237,000; it will be worth $26,000 in 8 years; and it will have annual operating and maintenance costs of $19,000/year . If the new system is purchased, the...

A firm is considering leasing or buying a mower. The mower costs $1000 and can be...

A firm is considering leasing or buying a mower. The mower costs $1000 and can be depreciated and falls into the MACRS 3 year class (33%; 45%; 15% and 7%). A maintenance contract will be purchased for $200 per year payable at the start of each year for 4 years. The firms tax rate is 30%. The firm expects to sell the mower for $97 at the end of the 3rd year. What is the net sale price when the...

In considering leasing versus buying decisions, if cost of debt is 8%, corporate tax is 40%,...

In considering leasing versus buying decisions, if cost of debt is 8%, corporate tax is 40%, What discout rate shall we use?

On July 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment...

On July 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $148,700 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $148,700 Life of store equipment 16 years Estimated residual value of store equipment $17,000 Yearly costs to operate the warehouse,...

Question