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    Andiola Corporation - Buy vs lease

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    Question 6. Andiola Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. If the company purchases the equipment for $900,000 it will depreciate it over 5 years, using straight-line depreciation. If the company enters into a 5-year lease, the lease payment is $230,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 11 percent.

    a. Calculate the cost of purchasing the equipment.

    b. Calculate the cost of leasing the equipment.

    c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment?

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    Solution Preview

    a. Calculate the cost of purchasing the equipment.

    PV of the loan= $900,000

    Depreciation per year = $180,000 (=$900,000/5 ; straight line depreciation)
    Tax rate = 30%
    Tax shield on depreciation= $54,000 =30.%180000

    interest rate = 11%
    PV of tax shield is obtained by discounting at ...

    Solution Summary

    The solution evaluates the buy vs lease decision.