00:01
Precision tool is trying to decide whether to lease or to buy.
00:09
That is the question.
00:13
New equipment for its tool and die operations.
00:16
The equipment costs $1 .2 million, its life expectancy is seven years, and it'll be worthless after that seven years.
00:36
So there is no salvage value to consider.
00:38
The pre -tax cost of borrowed funds is 8%.
00:53
And the tax rate is 32%.
01:00
The equipment can be leased for $242 ,500 a year.
01:14
So the question is, what is the net advantage to leasing? so the lease payment, we know, as we're told it, is $242 ,500.
01:40
The after -tax lease payment is $2 ,500 ,000 ,500 times one -money -tax.
01:57
Minus 0 .32.
01:59
We get 240 ,500 times 1 minus 0 .32 gives me 0 .68.
02:10
And we're going to multiply that by the 242 ,500.
02:14
And i get 164 ,900.
02:17
That is my after -tax lease payment.
02:20
The annual depreciation, we're just going to use straight -line depreciation here, is the equipment cost, divided by the useful life.
02:41
The equipment costs is $1 ,200 ,000, and its useful life is seven years.
02:48
So we take $1 ,200 ,000, divide that by seven, and i get $171 ,428 .57 per year.
03:02
That is the depreciation each and every year.
03:05
The annual depreciation tax shield is that $171 ,000.
03:28
$428 .57 times the 32 % tax rate...