Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be \(10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.

The other alternative is to sign two operating leases, one with payments of \)2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.

g. Which alternative should be selected, based on minimizing the present value of after-tax costs?

Step by step solution

01

Information available

The present value of the after-tax cost of leasing = $7,585

The present value of the after-tax cost of borrow-purchase= $6,937

02

Decision regarding the selection of the alternative

The present value of the after-tax cost of the borrow-purchase option is less than the present value of the after-tax cost of the leasing alternative, so the organisation should select the borrow-purchase decision.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!