Question: Laurence Electronics is considering whether to borrow funds and buy an asset or to lease the asset under an operating lease contract. If it purchases the asset, the cost will be 8,000 dollar. It can borrow funds for four years at 12% interest. The firm will use the three-year MACRS depreciation category [Associated 4 year write-off). Suppose a tax rate of 35%.
The other option is to sign two operating leases, one with payments of $2,100 for the 1st two years, and the other with payments of $3,700 for the last 2 years. In your analysis, round all values to the nearest dollar.
[A] Calculate the after tax cost of the leases for the four years.
[B] Calculate the yearly payment for the loan (round to the nearest dollar).
[C] Calculate the amortization schedule for the loan. [Disregard a small difference from a zero balance at the end of the loan due to rounding.]
[D] Find the depreciation schedule (see Table 12–9 in Chapter 12).
[E] Calculate the after tax cost of the borrow purchase option.
[F] Calculate the present value of the after tax cost of the two alternatives. Use a discount rate of 8%.
[G] Which option should be selected, based on minimizing the present value of after tax costs?