Compute the after-tax cost of purchasing

Reference no: EM13279470

Smith Corporation is considering the lease of an automated production line costing $500,000 from Ace Leasing. The period of the lease will be 4 years. The welder will be depreciated under MACRS rules for a 3-year class asset. Smith's marginal tax rate is 30%. Annual lease payments will be $190,000. Estimated salvage value is zero. Q1. If Ace's after-tax cost of borrowing is 16%, compute the after tax cost of leasing. Smith could also purchase the electronic welder for $500,000. The firm would finance the purchase of the machine with a 16%, 4-year loan requiring end -of-year installment payments of $178,690. It would be depreciated under MACRS using a 5-year recovery period. The firm would pay $5,000 per year for a service contract that covers all maintenance costs. There is no salvage value. Q2. Compute the after-tax cost of purchasing.

Reference no: EM13279470

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