8.1. Carnoustie Corporation needs 145 desktop computers, which it can buy for $1

Question

8.1. Carnoustie Corporation needs 145 desktop computers, which it can buy for $1700 each. Carnoustie will depreciate the computers uniformly over their useful life of 4 years. An investment tax credit of 6% is also available, and the computers will have no residual value. Carnoustie plans to borrow the money at an interest rate of 10% specifically to finance the purchase. The tax rate of Carnoustie is 35%. Prestwick Leasing Corporation can also lease the same computers to Carnoustie for the same period. Calculate the total annual lease payments for all computers, made in advance each year, and their tax benefit taken right away, that will make Carnoustie indifferent to leasing or buying.

ANSWER: $68,417.71; PLEASE SHOW SOLUTIONS.

Explanation / Answer

Answer :

Computer cost =145*1700 = 246500 Opening balance depreciation net value Interest 246500 0 0 0 246500 61625 184875 18487.5 184875 61625 123250 12325 123250 61625 61625 6162.5 61625 61625 0 4985.84 Total Interest 41960.84 Tax Incentive 14790 Total Value 273670.84 Annual Lease Payment 68417.71

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