Question

Comey Products has decided to acquire some new equipment having a $250,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) The firm can borrow at a 9% rate and pays a 25% federal-plus-state tax rate. Comey is considering leasing the property but wishes to know the cost of borrowing that it should use when comparing purchasing to leasing and has hired you to answer this question. What is the correct answer to Comey’s question? (Hint: Use the shortcut method to find the after-tax cost of the loan payments.) Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Cost of Interest

rate of interest =9%

Amount Cost =$250,000

Time =4 year.

Total Interest  = Cost *Rate *Time

Interest =$250,000*9%*4

Inteerest =22500*4

Interest =90,000/-

Calculation of Tax Saving on Deperication on Assets.

year	MACRS Rate	Dep.Amount $	Tax @25% on
1	0.3333	83,332.5	20,833.12
2.	0.4445	1,11,125	27,781.25
3	0.1481	37,025	9,256.25
4	0.0741	18,525	4631.25
		Total	62,501.87

Net Benefit of Purchase of Assets

= Interest cost-Saving in Tax on Purchase of assets

=90,000-62501.87

=$27,498.13/- Answer.

Thanks