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Question

LoTech Welding can purchase a machine for $175,000 and depreciate it as 5-year MACRS property. Annual maintenance would be$9800, and its salvage value after 8 years is $15,000. The machine can also be leased for$35,000 per year on an “all costs” inclusive lease (maintenance costs included). Lease payments are due at the beginning of each year, and they are tax deductible. The firm’s combined tax rate for state and federal income taxes is 40%. If the firm’s after-tax interest rate is 9%, which alternative has the lower EAC and by how much

Solution

VerifiedAnswered 2 years ago

Answered 2 years ago

Step 1

1 of 14**Leasing**

The annual payments are tax deductible, therefore the annual tax savings are

$\begin{aligned} T &= \$35{,}000 \cdot t\\ &= \$35{,}000 \cdot 0.4\\ &= \$14{,}000 \end{aligned}$

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