Williams\' Paints is weighing a lease versus a purchase of some new machinery. T
ID: 2749951 • Letter: W
Question
Williams' Paints is weighing a lease versus a purchase of some new machinery. The purchase price is $312,000. The equipment will be depreciated to zero over the 4-year life of the project after which time it is expected to have a resale value of $76,000. The firm uses straight-line depreciation and can borrow money at 8 percent. The equipment can be leased for $66,000 a year for 4 years. Williams' Paints does not expect to owe any taxes for the next 4 years because of its net operating losses. What is the net advantage to leasing?
a. $9,846
b. $11,900
c. $24,924
d. $28,207
e. $37,537
Explanation / Answer
Year
0
1
2
3
4
Annual lease payments
-$66,000
-$66,000
-$66,000
-$66,000
Saving of cost of machinery
$312,000
Loss of Salvage value
-$76,000
Net cash flow
$312,000
-$66,000
-$66,000
-$66,000
-$142,000
Present value factor @ 8%
1
0.9259
0.8573
0.7938
0.7350
Present value of cash flow
$312,000
-$61,109.40
-$56,581.80
-$52,390.80
-$104,370
Net advantage of leasing = $312,000 - $61,109.40 - $56,581.80 - $52,390.80 - $104,370 = $37,548
Hence, answer is e. $37,537
Year
0
1
2
3
4
Annual lease payments
-$66,000
-$66,000
-$66,000
-$66,000
Saving of cost of machinery
$312,000
Loss of Salvage value
-$76,000
Net cash flow
$312,000
-$66,000
-$66,000
-$66,000
-$142,000
Present value factor @ 8%
1
0.9259
0.8573
0.7938
0.7350
Present value of cash flow
$312,000
-$61,109.40
-$56,581.80
-$52,390.80
-$104,370
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