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Knight Motors is considering either leasing or buying some new equipment. The lease payments would be...

Knight Motors is considering either leasing or buying some new equipment. The lease payments would be $14,500 a year for 3 years. The purchase price is $52,000. The equipment has a 3-year life and then is expected to have a resale value of $12,000. Knight Motors uses straight-line depreciation, borrows money at 9 percent, and has a 35 percent tax rate. What is the net advantage to leasing?

A) -$1,611 B) -$2,212 C) -$2,742 D) $3,529 E) $3,898

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Answer #1
Option-1 Leasing
Annual Lease rent -14500
Less: tax rate @ 35% 5075
After tax Iease rent -9425
Multiply: Annuity PVF 2.53129
Present value of outflows -23857.4
Option-2 Purchase:
Tax shield in dep 6066.667
(52000/3*35%)
Multiply: Annuity factor 2.53129
Present value of tax shield 15356.49
Present value of Salvage 9266.208
(12000*0.772184)
Initial Investment -52000
Present value of purchase -27377.3
Net Benefit of leasing = 27377.3-23857.4 = 3519.90
Answer is D. $ 3529.
The difference is due to rounding off.
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