Bob's Pizza is considering either leasing or buying a new oven. The lease payments would be $10,200 a year for 3 years

Bob's Pizza is considering either leasing or buying a new oven. The lease payments would be $10,200 a year for 3 years. The purchase price is $29,000. The equipment has a 3-year life and then is expected to have a resale value of $3,100. Bob's Pizza uses straight-line depreciation, borrows money at 10 percent, and has a 32 percent tax rate. What is the net advantage to leasing?    A.  $809 B.  $833 C.  $848 D.  $853 E.  $898 Aftertax lease payment = $10,200 (1 - 0.32) = $6,936 Lost depreciation tax shield = ($29,000/3) (0.32) = $3,093.33 Aftertax salvage value = $3,100 (1 - 0.32) = $2,108 Discount rate = 0.10 (1 - 0.32) = 0.068

47.

Charleston Marina is considering either leasing or buying some new equipment it needs for repairing boats. The lease payments would be $7,200 a year for 3 years. The purchase price is $20,800. The equipment has a 3-year life and then is expected to have a resale value of $4,700. The firm uses straight-line depreciation, borrows money at 8.5 percent, and has a 34 percent tax rate. What is the net advantage to leasing?    A.  -$1,507 B.  -$1,222 C.  -$975 D.  $408 E.  $611 Aftertax lease payment = $7,200 (1 - 0.34) = $4,752 Lost depreciation tax shield = ($20,800/3) (0.34) = $2,357.33 Aftertax salvage value = $4,700 (1 - 0.34) = $3,102 Discount rate = 0.085 (1 - 0.34) = 0.0561

48.

Fargo North is considering the purchase of some new equipment costing $118,000. This equipment has a 5-year life after which it will be worthless. The firm uses straight-line depreciation and borrows funds at 9 percent interest. The company's tax rate is 33 percent. The firm also has the option of leasing the equipment. What is the amount of the break-even lease payment?    A.  $30,220 B.  $31,467 C.  $31,775 D.  $33,719 E.  $34,897 Depreciation tax shield = ($118,000/5) (0.33) = $7,788 Discount rate = 0.09(1 - 0.33) = 0.0603 $118,000 = C(PVIFA6.03%, 5); C = $28,035.64 Break-even lease payment = ($28,035.64 - $7,788)/(1 - 0.33) = $30,220

49.

A firm borrows money at 8.75 percent, uses straight-line depreciation, and has a 37 percent tax rate. The firm's break-even aftertax annual lease payment on a machine is $16,511. How much will the firm have to pay annually to the lessor to lease this machine?    A.  $16,511 B.  $19,408 C.  $22,620 D.  $23,919 E.  $26,208 Break-even lease payment = $16,511/(1 - 0.37) = $26,208

50.

Fireplaces and More is considering the purchase of a delivery truck costing $27,000. The truck will be used for 5 years and then it will be worthless. The financing rate for the purchase is 7.5 percent and the corporate tax rate is 32 percent. The firm uses straight-line depreciation. What is the break-even lease payment amount?    A.  $6,655 B.  $7,148 C.  $7,546 D.  $8,038 E.  $8,254 Depreciation tax shield = ($27,000/5) (0.32) = $1,728 Discount rate = 0.075 (1 - 0.32) = 5.10 percent $27,000 = C(PVIFA5.10%, 5); C = $6,253.57 Break-even lease payment = ($6,253.57 - $1,728)/(1 - 0.32) = $6,655