9. A small real estate office needs a new copier. They have their choice between
ID: 2804854 • Letter: 9
Question
9. A small real estate office needs a new copier. They have their choice between leasing a new copier for $2,000 per year with all maintenance included or they can purchase their own copier for $4,200 and would incur $1,200 per year in operating costs. Paper and cartridge costs for the copier would be identical in either case. The lease would be for a total of 6 years and the copier, if bought, would have a useful life of 6 years and no expected salvage value at the end of that time. Determine if owning the machine would be cheaper on a per-year basis than leasing the machine. Then firm’s tax rate is 34% and the proper required rate of return for the project would be 7%.
Explanation / Answer
Lease payments = 2000
Tax shield = 2000*34% = 680
Cashflow = 2000-680 = 1320
Machine depreciation = 4200 / 6 = 700
Operating cost = 1200
Tax shield = 34%*(1200+700) = 646
after tax rate = 7%*(1-34%) = 4.62%
Annual machine cost = 4200*4.62% / (1-(1+4.62%)-6) = 817.44
Total cashflow = 1200 + 817.44 - 646 = 1371.44
No, Leasing will be cheaper than buying eqipment
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