National Event Coordinators is contemplating the acquisition of a new tent that
ID: 2745345 • Letter: N
Question
National Event Coordinators is contemplating the acquisition of a new tent that will be used for major outdoor events. The purchase price is $152,000. 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 tents have a 4-year life after which time they are worthless. The tent can be leased for $35,000 a year. The firm can borrow money at 10 percent and has a 34 percent tax rate. What is the net advantage to leasing?
Explanation / Answer
Yearly advantage would be the cash flow from buy option minus cash flow from lease option.
To get the Net advantage to leasing, we will compute the present value of advantage and add the PVs.
Year
Buy
Lease
Advantage
PV factor 10%
PV
0
-152000
35000
187000.00
1.00000
187000.00
1
0.00
35000
35000.00
0.90909
31818.18
2
0.00
35000
35000.00
0.82645
28925.62
3
0.00
35000
35000.00
0.75131
26296.02
4
0.00
0
0.00
0.68301
0.00
274039.82
Therefore, net advantage to leasing would be 274039.82.
Year
Buy
Lease
Advantage
PV factor 10%
PV
0
-152000
35000
187000.00
1.00000
187000.00
1
0.00
35000
35000.00
0.90909
31818.18
2
0.00
35000
35000.00
0.82645
28925.62
3
0.00
35000
35000.00
0.75131
26296.02
4
0.00
0
0.00
0.68301
0.00
274039.82
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