You work as a financial analyst at Stanley Furniture Company. You are evaluating

Question

You work as a financial analyst at Stanley Furniture Company. You are evaluating a potential lease agreement on a new machine. The new machine can be purchased on January 1 for $500,000 and can be depreciated over 3-year period using Straight Line Method. The machine has a 5-year actual life and the salvage value at the end of the 5 years is $100,000. The operating expenses of the machine will be $3, 000 per year. The lease calls for 5 annual payments of $80,000 per year with the first payment occurring immediately. (The lease payments will occur at the end beginning of each year and the tax benefits associated with the lease payment occur at the end of the year) The interest rate on the company's debt is 9%.The weighted average cost of capital of the firm is 15%. The corporate tax rate is 40%. What is the Cost of Owning? What is the Cost of Leasing? What is Net Advantage to Leasing? What is the minimum salvage value for you to be indifferent between lease and buying?

Explanation / Answer

Depreciation each year = ($500,000 - $100,000) / 3

= $133,333.33

(a) Cost of owning = $500,000 - $133,333.33 * 40% / (1+15%) - $133,333.33 * 40% / (1+15%)2 - $133,333.33 * 40% / (1+15%)3 - $100,000.00 / (1+15%)5

= $328,510.32

(b) Cost of leasing = $80,000 * [1 - (1+15%)-5] * (1+15%) / 15% - $80,000* 40% * [1 - (1+15%)-5] / 15%

= $201,129.31

(c) Net advantage to leasing = $328,510.32 - $201,129.31

= $127,381.01

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.