Edison Electronics: Cost of Lease, Payment and Amortization Schedule
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Edison Electronics is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $8,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent. The other alternative is to sign two operating leases, one with payments of $2,100 for the first two years, and the other with payments of $3,700 for the last two years. In your analysis, round all values to the nearest dollar.
a. Compute the after-tax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
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Solution Summary
You will find the answers to this very involved assignment inside, including a computation of the after-tax cost of the leases, the annual payment of the loan, and the amortization schedule for the loan.
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a. Compute the after-tax cost of the leases for the four years.
The payments of operating leases are: 2,100 for year 1 & 2, and $3,700 for year 3 & 4.
The after tax cost = payment * (1-tax):
Year Lease Payment Cost after 35% tax Present ...
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