Jane's Floor Care is contemplating the acquisition of some new equipment for refinishing wood floors. The purchase price is $74,000

Jane's Floor Care is contemplating the acquisition of some new equipment for refinishing wood floors. The purchase price is $74,000. 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 equipment can be leased for $24,600 a year. The firm can borrow money at 9.5 percent and has a 34 percent tax rate. What is the amount of the depreciation tax shield in year 4?    A.  $1,758.09 B.  $1,864.36 C.  $1,940.80 D.  $2,011.67 E.  $2,221.08 Year 4 depreciation tax shield = $74,000 (0.0741) (0.34) = $1,864.36

36.

Steven's Auto Detailers is trying to decide whether to lease or buy some new equipment for polishing vehicles. The equipment costs $22,000, has a 3-year life, and will be worthless after the 3 years. The aftertax discount rate is 6.2 percent. The annual depreciation tax shield is $1,760 and the aftertax annual lease payment is $6,800. What is the net advantage to leasing?    A.  -$796.58 B.  -$397.11 C.  $184.92 D.  $315.40 E.  $462.84 NAL = $22,000 - ($6,800 + $1,760) (PVIFA6.2%, 3) = -$796.58

37.

Precision Tool is trying to decide whether to lease or buy some new equipment for its tool and die operations. The equipment costs $1.2 million has a 7-year life, and will be worthless after the 7 years. The pre-tax cost of borrowed funds is 8 percent and the tax rate is 32 percent. The equipment can be leased for $242,500 a year. What is the net advantage to leasing?    A.  -$51,566 B.  -$34,211 C.  $37,549 D.  $56,828 E.  $79,664 Aftertax lease payment = $242,500 (1 - 0.32) = $164,900 Annual depreciation tax shield = ($1,200,000/7) (0.32) = $54,857.14 Aftertax discount rate = 0.08 (1 - 0.32) = 5.44 percent NAL = $1,200,000 - ($164,900 + $54,857.14) (PVIFA5.44%, 7) = -$51,566

38.

Deep Mining, Inc., is contemplating the acquisition of some new equipment for controlling coal dust that costs $174,000. 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. After that time, the equipment will be worthless. The equipment can be leased for $53,100 a year for 4 years. The firm can borrow money at 11.5 percent and has a 36 percent tax rate. What is the net advantage to leasing?    A.  $5,225 B.  $5,607 C.  $6,611 D.  $6,847 E.  $6,950 After-tax lease payment = $53,100 (1 - 0.36) = $33,984 Lost depreciation tax shield year 1 = $174,000 × 0.3333 × 0.36 = $20,877.91 Lost depreciation tax shield year 2 = $174,000 × 0.4444 × 0.36 = $27,837.22 Lost depreciation tax shield year 3 = $174,000 × 0.1482 × 0.36 = $9,283.25 Lost depreciation tax shield year 4 = $174,000 × 0.0741 × 0.36 = $4,641.62 Aftertax discount rate = 0.115 (1 - 0.36) = 0.0736

39.

National Event Coordinators is contemplating the acquisition of a new tent that will be used for major outdoor events. The purchase price is $147,000. 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 tent will be worthless after four years. The tent can be leased for four years at $42,500 a year. The firm can borrow money at 7.5 percent and has a 34 percent tax rate. What is the net advantage to leasing?    A.  $1,789 B.  $1,862 C.  $1,922 D.  $2,087 E.  $2,127 After-tax lease payment = $42,500 (1 - 0.34) = $28,050 Lost depreciation tax shield year 1 = $147,000 × 0.3333 × 0.34 = $16,658.33 Lost depreciation tax shield year 2 = $147,000 × 0.4444 × 0.34 = $22,211.11 Lost depreciation tax shield year 3 = $147,000 × 0.1482 × 0.34 = $7,407.04 Lost depreciation tax shield year 4 = $147,000 × 0.0741 × 0.34 = $3,703.52 After-tax discount rate = 0.075 (1 - 0.34) = 0.04983