Your small business needs to buy new office furniture for your new headquarters.
ID: 2633515 • Letter: Y
Question
Your small business needs to buy new office furniture for your new headquarters. You have the option of leasing the furniture, or buying the furniture. You can purchase the furniture for $15,000 per year, or lease the same furniture for $5,000 per year for the next four years. Your company has a marginal tax rate of 40%. Depreciation will amount to $3,750 per year and the furniture will be replaced after 4 years. If your company buys the furniture, they will borrow at 7%.
Required: Calculate the total cost for both options. Leasing vs. buying: which is the best option for your small business and why?
Please note, the $15,000 is PER YEAR, not a total initital cost for purchasing.
Explanation / Answer
purchase option
purchase price=15000
Interest =1050
Depreciation=3750
tax saved on Dep.+int.=4800*40%=1920
Total cash outflow=15000+1050-1920=14130
Lease option
Payment each year=5000
Tax saved=5000*40%=2000
Total cash outflow=3000
2. As, the outflow in lease option is less lease option is the best option.
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