Chandrasekhar Corporation plans to acquire a corporate jet, by either leasing it

Question

Chandrasekhar Corporation plans to acquire a corporate jet, by either leasing it or buying it. The five annual lease payments are $245,000 each, payable in advance. The company can buy the jet by borrowing money at 9% interest. The tax rate of the company is 30%, and it uses straight-line depreciation. Calculate the price of the jet, which will equate the cost of buying to the cost of leasing. Assume that the tax benefits of lease payments are available immediately. Answer is $2,166,738 Please show work.

Explanation / Answer

Let the price of the Jet be X$ If the same is purchased Price of Jet = X Interest payable @ 9% = X * .09 Depreciation on Jet = X/5 Income Tax @ 30% on Purchase Price = (X + .09X - X/5)* 30% Adjusted Purchase Price = (X+0.09X-X/5)*.7 This should be equivalent to the five year lease payments @ $245,000 each = $ 1,225,000 Therefore, going by the equation, 0.623 X = $ 1,225,000 Hence, X = 1966292 $ In case the price of the jet is $ 1,966,292, then the adjusted cost of buying it will be equivalent to the cost of leasing the jet

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