lease vs buy 3 - 4

Data for Walton Publishing Company:
Cost of equipment	250.000
Residual value	25.000
Maintenance	5.000	per year payable at the beginning of each year
Lease payments	71.000	per year payable at the beginning of each year
Tax rate	40.0%
Interest	8.0%
After-tax cost of debt	4.8%	= interest rate x (1 - tax rate)

Year	0	1	2	3	4
MACRS 3-year factors							= from MACRS table in book
Depreciation							= cost of machine x MACRS factor
Tax shield from depreciation


Cost of Owning	0	1	2	3	4
PV Loan							= given
Maintenance cost							= given
Tax shield from maintenance							= maintenance cost x tax rate
Tax shield from depreciation							= from above
Residual value							= given
Tax on residual value							**see below
Net cash flow
PV Cost of ownership@ 4.8%

Cost of Leasing	0	1	2	3	4
Lease payments							= given
Tax shield from lease							= lease payments x tax rate
After-tax lease payments
PV cost of leasing@ 4.8%

Net Advantage to Leasing


**Computation of tax on residual value
Original cost of machine
Accumulated depreciation
Book Value

Residual value
Book value
Gain from sale of machine
Tax rate
Tax on residual value


Data for Treadmill Trucking Company:
Cost of equipment	1.000.000
Residual value	100.000
Maintenance	10.000	per year payable at the beginning of each year
Lease payments	205.000	per year payable at the beginning of each year
Tax rate	20.0%
Compound Interest	10.0%
After-tax cost of debt	8.0%	= interest rate x (1 - tax rate)

Year	0	1	2	3	4	5
MACRS 5-year factors		0.20	0.32	0.19	0.12	0.12	= from MACRS table in book
Depreciation							= cost of machine x MACRS factor
Tax shield from depreciation


Cost of Owning	0	1	2	3	4	5
PV Loan							= given
Maintenance cost						0	= given
Tax shield from maintenance						0	= maintenance cost x tax rate
Tax shield from depreciation						0	= from above
Residual value						100.000	= given
Tax on residual value						0	**see below
Net cash flow						100.000
PV Cost of ownership@ 8%

Cost of Leasing						5
Lease payments						0	= given
Tax shield from lease						0	= lease payments x tax rate
After-tax lease payments						0
PV Cost of ownership@ 8%

Net Advantage to Leasing


**Computation of tax on residual value
Original cost of machine
Accumulated depreciation
Book Value

Residual value
Book value
Gain from sale of machine
Tax rate
Tax on residual value

12 years ago

Report issue

lease vs buy 3 - 4

NOT RATED

Purchase the answer to view it

lease_vs_buy_3-4.xlsx