Net advantage to leasing, Purdue Systems can purchase a

Net advantage to leasing

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Reference no: EM131188137

(Excel: net advantage to leasing) Purdue Systems can purchase a commercial DVD burner for 3,000,000. The equipment will be depreciated as three-year MACRS property. The depreciation tax savings will be realized at the end of each year. The equipment will have a five-year life and will have a before-tax salvage value of $700,000. Purdue Systems has a before-tax cost of debt of 9% and a cost of capital of 12%. Lafayette Leasing will purchase this DVD burner and lease it to Purdue Systems for five years, charging a lease payment of $550,000 payable at the beginning of each year. The tax savings on a lease payment is realized at the time the payment is made. Purdue will have no rights to purchase or use the equipment at the end of the five-year lease period. Purdue has a 30% marginal tax rate. What is the net advantage of leasing for Purdue Systems?

Reference no: EM131188137

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