case about lease--summer (2)
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8/16/2019 Case About Lease--summer (2)
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The Cap-Short Corporation is debating whether to acquire an asset through an operatinglease arrangement or to borrow funds and purchase the asset. The purchase price of theasset, $100,000, can be financed with a four-year, 1! ban" loan. #f purchased, the assetwill be depreciated as three-year property with no epected sal%age at the end of its four-year life. <ernati%ely, the firm can obtain the use of the asset through two operating
leases of two years each. The lease payments would be $'0,000 per year on the firstlease and $',000 per year on the second lease. The firm(s ta rate is approimately')!. *hich alternati%e should be selected based on minimi+ing the present %alue ofafterta costs
Annual loan payment
Amortization Table
Year
Beginning
Balance
Annual
Payment
Annual
Interest
Payment of
Principal
Ending
Balance
1
'
)
$100,000.00
/,/'.'
,/)'.
'0,).
$',0.
',0.
',0.
',0.
$1,000.00
11,//.0
,)1.'
),.
$0,0.
',0'0.1
,)).)
'0,).)2
$/,/'.'
,/)'.
'0,).
02
23rincipal payment differs slightly from the amount owed because ofrounding.
8/16/2019 Case About Lease--summer (2)
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Depreciation Schedule
Year
Rate of
Depreciation
ost of Asset
Annual
Depreciation
1
'
)
.'''
.))
.1)
.0)
$100,000
100,000
100,000
100,000
$'','00
)),00
1),00
,)00
Afterta! ost of "perating #eases
Year
Payment
Ta! Shield
Afterta! ost
1
'
)
$'0,000
'0,000
',000
',000
$10,00
10,00
11,/00
11,/00
$1/,00
1/,00
',100
',100
Aftertax Cost of Borrow-Purchase
8/16/2019 Case About Lease--summer (2)
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Year
Payment
Interest
Depreciation
Total Tax
Deduction
Tax
Shield
Net After-
Tax Cost
1
2
3
4
$35,026.2735,026.27
35,026.27
35,026.27
$15,000.0 011,996.068,541.53
4,568.82
$33,300
44,500
14,800
7,400
$48,300.00
56,496.06
23,341.53
11,968.82
$16,422.00
19,208.66
7,936.12
4,069.40
$18,604.27
15,817.61
27,090.15
30,956.87
4iscount rate 5 afterta cost of debt 5 .161 - .')7 5 .0// 5 10!
$et Present %alue omparison
#easing
Borro&'Purchase
Year
Afterta! ost
of #easing
I( at
)*+
Present
%alue
Afterta! ost of
Borro&'Purchase
I( at
)*+
Present
%alue
1
'
)
$1/,00
1/,00
',100
',100
./0/
.
.1
.'
$1,//.01,').0
1,').10
1,.'0
$,).)0
$1,0).1
1,1.1
,0/0.1
'0,/.
./0/
.
.1
.'
$1,/11.
1',0.'
0,')).0
1,1)'.)
$1,)).
8ased solely on the present %alue of costs, the leasing arrangement is the preferablemeans of acquiring the asset. The choice may be based on other factors, howe%er, sincethe difference in costs is not large.
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