case about lease--summer (2)

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. &lternati%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.



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



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.

case about lease--summer (2)

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