Leasing 1. Furman Industries is negotiating a lease on a new piece of equipment
ID: 2807714 • Letter: L
Question
Leasing 1. Furman Industries is negotiating a lease on a new piece of equipment that would cost $100,000 if pur- chased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because Furman plans to move to a new facility at that time. The applicable MACRS depreciation rates are 0.33, 0.45, 0.15, and 0.07. It is estimated that the equipment could be sold for $30,000 after 3 years of use. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year of usage. Conversely, Furman 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. Furman is in the 30% tax bracket, and it could obtain a loan to purchase the equipment at a before-tax cost of 10 percent. Should Furman Industries lease?Explanation / Answer
MARR 10% Before tax 7% After Tax Purchase 0 1 2 3 Initial Cost Depreciation tax savings A (100,000) 9,900 13,500 4,500 B (2,100) (2,100) (2,100) 23,100 (30000-0.3x23000) Maintenance cost net of tax SV net of tax C = A+B (102,100) 7,800 11,400 27,600 PVF at 7% 1 0.934579439 0.873438728 0.816297877 PV $ (102,100.00) $ 7,289.72 $ 9,957.20 $ 22,529.82 $ (62,323.26) NPV = sum total Hint Initial Cost Dep. rate Depreciation Tax rate Tax Saving 100000 x 0.33 = 33,000 30% 9900 100000 x 0.45 = 45,000 30% 13500 100000 x 0.15 = 15,000 30% 4500 Maintenace cost 3000 x (1-0.3) 2,100 Lease 0 1 2 3 Lease cost -20300 -20300 -20300 29000 x (1-0.3) 20300 PVF at 7% 1 0.934579439 0.873438728 PV $ (20,300.00) $ (18,971.96) $ (17,730.81) $ (57,002.77) NPV = sum total Net advantage of leasing = $ 5,320.49 Lease; the PV of leasing costs is $5,320 less than the PV of owning costs.
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