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Howell Auto Parts: Lease vs buy

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Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement.If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12%. The firm will use the three year MACRS depreciation category(with the associated 4-year write off). Assume a tax rate of 35%

a. Compute the aftertax cost of the lease for 4 years.
b. Compute the annual payment for the loan.
c.Compute the amortization schedule for the loan.
d. Determine the depreciation schedule.
e. Compute the after tax cost of borrow-purchase alternative.
f.Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8%
g.Which alternative should be selected, based on miimizing the present value of aftertax costs?

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Solution Summary

The solution evaluates a lease vs buy decision: It
a. Computes the aftertax cost of the lease for 4 years.
b. Computes the annual payment for the loan.
c. Computes the amortization schedule for the loan.
d. Determines the depreciation schedule.
e. Computes the after tax cost of borrow-purchase alternative.
f. Computes the present value of the aftertax cost of the two alternatives.

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