40. Baxter Contractors is evaluating the lease versus the purchase of a $329,000
ID: 2805421 • Letter: 4
Question
40.
Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine. The machine will be depreciated using MACRS over a 4-year period, after which the machine will be worthless. MACRS allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The machine could be leased for $105,000 a year for 4 years. The firm can borrow money at 9.5 percent and has a 35 percent tax rate. The firm does not expect to pay any taxes for the next 5 years. What is the net advantage to leasing?
A.
-$4,587
B.
-$7,471
C.
-$18,640
D.
-$21,651
E.
-$30,277
I understand I should be using the TVM functions on my calculator to solve for a PVA, but I am confused about what I am trying to find using my calculator. Am I solving for PMT or PV and then subtracting that from the amount it would cost to buy the project?
40.
Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine. The machine will be depreciated using MACRS over a 4-year period, after which the machine will be worthless. MACRS allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The machine could be leased for $105,000 a year for 4 years. The firm can borrow money at 9.5 percent and has a 35 percent tax rate. The firm does not expect to pay any taxes for the next 5 years. What is the net advantage to leasing?
A.
-$4,587
B.
-$7,471
C.
-$18,640
D.
-$21,651
E.
-$30,277
I understand I should be using the TVM functions on my calculator to solve for a PVA, but I am confused about what I am trying to find using my calculator. Am I solving for PMT or PV and then subtracting that from the amount it would cost to buy the project?
Explanation / Answer
Ans is B -$7,471
Explanation: since firm does not expect to pay any tax next 5 years, including tax in this analysis is irrelevant, we simply have to determine the PV of lease payments and any excess of that Present value of lease payment is net advantage to leasing.
NAL = $329,000 - $105,000(P/A, 9.5%, 4)
NAL = $329,000 - $105,000 x 3.204481
NAL = $329,000 – 336,470.51
NAL = $7471 rounded
Using financial calculator, set N = 4, I/Y = 9.5, PMT = -105000 Press CPT + PV, result will be $336,470.52
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