Thomas Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. The company expects to use the equipment for 5 years, with no expected salvage value. The purchase price is $1 million and MACRS depreciation, 3-year class, will apply. If the company enters into a 5-year lease, the lease payment is $230,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 11 percent.
a. Calculate the cost of purchasing the equipment.
| Cost of equipment |
$1,000,000 |
|
|
|
| MACRS depreciation |
0.33 |
0.45 |
0.15 |
0.07 |
| 5-year lease |
|
|
|
|
| Lease payment -BGN year |
$230,000 |
|
|
|
| Loan |
11% |
|
|
|
| Tax rate |
30% |
|
|
|
| After-tax rate |
7.70% |
|
|
|
b. Calculate the cost of leasing the equipment.
C. Calculate the net advantage to leasing. Should the company purchase or lease the equipment. |