Solve: Lease Versus Buy
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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?
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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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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 ...
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