The loan payment (principal plus interest) is $4,475 per year. The present value interest factor for a 5-year annuity at 15%: $15,000 / 3.3522. The $5,000 salvage value is a reduction to the cost of owning and results in an after tax cost of owning the equipment of $5,197. EXERCISE 14: PURCHASE VERSUS LEASE CALCULATION Hull Manufacturing Co. must decide whether to purchase or lease a new piece of equipment. The equipment can be leased for $4,000 a year or purchased for $15,000. The lease includes maintenance and service. The salvage value of the equipment at the end of five years is $5,000. If the equipment is owned, service and maintenance charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing would you choose? Use the following capital cost allowance amounts. Year Amount 1 $4,500 3,150 2,205 1,543 1,081 3 4 5
The loan payment (principal plus interest) is $4,475 per year. The present value interest factor for a 5-year annuity at 15%: $15,000 / 3.3522. The $5,000 salvage value is a reduction to the cost of owning and results in an after tax cost of owning the equipment of $5,197. EXERCISE 14: PURCHASE VERSUS LEASE CALCULATION Hull Manufacturing Co. must decide whether to purchase or lease a new piece of equipment. The equipment can be leased for $4,000 a year or purchased for $15,000. The lease includes maintenance and service. The salvage value of the equipment at the end of five years is $5,000. If the equipment is owned, service and maintenance charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing would you choose? Use the following capital cost allowance amounts. Year Amount 1 $4,500 3,150 2,205 1,543 1,081 3 4 5
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter19: Lease Financing
Section: Chapter Questions
Problem 1P: Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the...
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Question
![The loan payment (principal plus interest) is $4,475 per year. The present value interest factor for a 5-year annuity at 15%: $15,000 / 3.3522.
The $5,000 salvage value is a reduction to the cost of owning and results in an after tax cost of owning the equipment of $5,197.
EXERCISE 14: PURCHASE VERSUS LEASE CALCULATION
Hull Manufacturing Co. must decide whether to purchase or lease a new piece of
equipment. The equipment can be leased for $4,000 a year or purchased for $15,000.
The lease includes maintenance and service. The salvage value of the equipment at
the end of five years is $5,000. If the equipment is owned, service and maintenance
charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire
amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing
would you choose?
Use the following capital cost allowance amounts.
Year
Amount
1
$4,500
3,150
2,205
1,543
1,081
3
4
5](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4a294647-fc89-4959-b0cc-3684be06999b%2F29852415-04ac-4997-9761-1e3352bec6cd%2F5lns88e_processed.png&w=3840&q=75)
Transcribed Image Text:The loan payment (principal plus interest) is $4,475 per year. The present value interest factor for a 5-year annuity at 15%: $15,000 / 3.3522.
The $5,000 salvage value is a reduction to the cost of owning and results in an after tax cost of owning the equipment of $5,197.
EXERCISE 14: PURCHASE VERSUS LEASE CALCULATION
Hull Manufacturing Co. must decide whether to purchase or lease a new piece of
equipment. The equipment can be leased for $4,000 a year or purchased for $15,000.
The lease includes maintenance and service. The salvage value of the equipment at
the end of five years is $5,000. If the equipment is owned, service and maintenance
charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire
amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing
would you choose?
Use the following capital cost allowance amounts.
Year
Amount
1
$4,500
3,150
2,205
1,543
1,081
3
4
5
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