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Solve: Lease Versus Buy

Assuming that Reynolds tax rate is 40 percent and the equipment's depreciation would be $100 per year. If the company leased the asset on a 2-year lease, the payment would be $110 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge 10 percent interest on the loan. Should Reynolds lease or buy the equipment?

Solution Preview

The cost of owning or leasing is the present value of cash flows. The discounting rate is the after tax cost of debt. The discounting rate is 10%X(1-0.4) = 6%

Cost of Leasing:
The payments are $110 per year payable at the beginning. The cash flow ...

Solution Summary

This solution explains in about 190 words how to decide between a lease and a buy decision. All calculations are shown.

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