Problem:
Neighborhood Savings Bank is considering leasing $100,000 worth of computer equipment. A 4 year lease would require payments in advance of $22,000 per year. The bank does not currently pay income taxes and does not expect to have to pay income taxes in the foreseeable future. If the bank purchased the computer equipment, it would depreciate the equipment on a straight-line basis down to an estimated salvage value of $20,000 at the end of the 4th year. The bank's cost of secured debt is 14%, and its cost of capital is 20%.
Required:
Question: Calculate the net advantage to leasing.
Note: Provide support for your underlying principle.