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

Solutions

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

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