Green Valley Farms is considering either leasing or buying some new farm equipme

Question

Green Valley Farms is considering either leasing or buying some new farm equipment. The lessor will charge $20,200 a year lease. The purchase price is $54,000. The equipment has a 3-year life after which time it will be worthless. Green Valley Farms uses straight-line depreciation, has a 32 percent tax rate, borrows money at 9 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years. What is the net advantage to leasing? O $2,868 O $1.950 O $3,979 $5,112 $1.133

Explanation / Answer

Present value of the leasing

PV = FV/(1+r)^n

PV - Present value

FV - Future value

r - Interest rate

n - no. of periods

PV = 20200/(1+0.09)^1 + 20200/(1+0.09)^2 + 20200/(1+0.09)^3 = 51132.15

Difference between purchasing and leasing = 54000 - 51132.15 = $2867.85

NAL = $2867.85 = 2868

Option A.

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