National Event Coordinators is contemplating the acquisition of a new tent that

Question

National Event Coordinators is contemplating the acquisition of a new tent that will be used for major outdoor events. The purchase price is $143,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The tents have a 4-year life after which time they are worthless. The tent can be leased for $41,000 a year. The firm can borrow money at 9 percent and has a 33 percent tax rate. What is the net advantage to leasing?

$-2,137

$5,758

$2,061

$6,644

$110

Explanation / Answer

We calculate the present values using the after tax cost of debt = 9% x (1 - 0.33) = 6.03%

To compute net advantage of leasing we compare the advantages and disadvantage of leasing as follows -

Particulars Year PVF@9% Amount Present Value Advantages of Leasing Savings in Purchase Cost 0 1 $143000 $143000 Add: Tax Savings on Lease rent 1 - 4 3.46272657481 $41000 x 33% = $13530 $46851 Total (A) $189851 Disadvantages of Leasing Payment of Lease Rent 1 - 4 3.46272657481 $41000 $141972 Add: Loss of Tax savings on depreciation (Original Cost x Depreciation Rate x Tax rate) 1 0.94312930302 $143000 x 33.33% x 33% = $15728.427 $14834 2 0.88949288222 $143000 x 44.44% x 33% = $20971.236 $18654 3 0.83890680205 $143000 x 14.82% x 33% = $6993.558 $5867 4 0.79119758752 $143000 x 7.41% x 33% = $3496.779 $2766 Total (B) $184093 Net Advantage of Leasing (A - B) $5758

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