Buster’s Beverages is negotiating a lease on a new piece of equipment that would
ID: 2767400 • Letter: B
Question
Buster’s Beverages is negotiating a lease on a new piece of equipment that would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL? (25 points)
MACRS 3-year class
Year Depreciation Rate
1 33%
2 45
3 15
4 7
Explanation / Answer
Since the Net cash flow for LEASE is less(-)ve than purchase, LEASE is preferred
DISCOUNTED CASH FLOW Year DF @9% Cash Flow Tax benefit Net cash Flow Lease Purchase Lease 0 1.0000 (103,000) - (103,000) (23,200) (103,000) (23,200) 1 0.9091 (13,000) 9,200 (3,800) (23,200) (3,455) (21,091) 2 0.8264 (13,000) 11,600 (1,400) (23,200) (1,157) (19,174) 3 0.7513 20,000 400 20,400 - 15,327 - (92,285) (63,464)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.