Fingm571 chapter 21 problem A3

Fingm571 chapter 21 problem A3

(Net advantage to leasing) A firm is considering leasing a computer system that costs $1,000,000 new. The lease requires annual payments of $135,000 in arrears for 10 years. The lessee pays income taxes at a 35% marginal rate. If it purchased the computer system, it could depreciate it to its expected residual value over 10 years. The lessee’s cost of similarly secured debt is 10% and its WACC is 15%.

1. Calculate the net advantage to leasing assuming zero residual value. Should the firm lease the computer system?

1. Calculate the net advantage to leasing assuming $250,000 residual value. Should the firm lease the computer syste