Sandia, Inc. wants to aquire a $360,000 computer controlled printing press. if o

Question

Sandia, Inc. wants to aquire a $360,000 computer controlled printing press. if owned the press would be depreciated on a straight-line basis over 10 years to a book salvage of $0. The actual cash salvage value is expected to be $25,000 at the end of ten years. If purchased, Sandia will incur annual maintenance expenses of $3,000. These expenses would not be incurred if the press is leased. If the press is purchased, Sandia could borrow the needed funds at an annual pre-tax interest rate of 10%. The lease rate would be $48,000 per year, payable at the beginnning of the year. If Sandia has an after-tax cost of capital of 12% and a marginal tax rate of 40%, what is the net avantage to leasing?

Explanation / Answer

Present value of Cost of Buying = Cost of Press + (Post Tax annual maintenance expenses-Annnual Depreciation Tax shield) *PVIFA(6%,10) - Post tax Salvage Value*PVIF(12%,10)

Present value of Cost of Buying = 360000 + (3000*(1-40%)-360000/10*40%)*7.360 - 25000*(1-40%) * 0.322

Present value of Cost of Buying = $ 262434

Present value of Cost of Leasing = Post tax Lease Payment at the Beginning *(1+PVIFA(6%,9))

Present value of Cost of Leasing = 48000*(1-40%)*(1+6.802)

Present value of Cost of Leasing = 224,697

Net avantage to leasing = Present value of Cost of Buying - Present value of Cost of Leasing

Net avantage to leasing = 262434-224697

Net avantage to leasing = 37737

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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