Question

In: Finance

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 $51,000, has a 3-year life and will be worthless after the 3 years. The pre-tax cost of borrowed funds is 7 percent and the tax rate is 35 percent. The equipment can be leased for $16,000 a year. What is the net advantage to leasing? (Do not round intermediate calculations.)

a. $4,831

b. $6,451

c. $6,097

d. $1,443

e. $3,710

Solutions

Expert Solution

Solution :

The Net advantage to leasing is = $ 6,096.78

= $ 6,097 ( when rounded off to a whole number )

Thus the solution is Option c. $ 6,097

Note :

The discount rate used in the solution is the after tax discount rate.

As per the information given in the question we have

Pre - tax Discount rate = 7 % ; Tax rate = 35 % = 0.35

Thus, after tax discount rate = Discount rate * ( 1 - Tax rate )

= 7 % * ( 1 - 0.35 ) = 7 % * 0.65 = 4.55 %

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


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