Medarex is considering the lease of an electronic welder costing $210,000 from Key Leasing. The lease period will be 6 years. The welder will be depreciated under MACRS rules for a 5-year class asset. Medarex's marginal tax rate is 40%. Annual lease payments will be $50,000. Salvage value is zero.
1. If Medarex's after-tax cost of borrowing is 15%, compute the after tax cost of leasing.
Medarex could also purchase the electronic welder for $210,000. The firm would finance the purchase of the machine with a 9%, 6-year loan requiring end -of-year installment payments of $46,813. It would be depreciated under MACRS using a 5-year recovery period. The firm would pay $1,500 per year for a service contract that covers all maintenance costs. There is no salvage value.
2. Compute the after-tax cost of purchasing