Audi Co. is trying to decide whether to lease or buy some new equipment for polishing vehicles. The equipment costs $22,000, has a 3-year life, and will be worthless after the 3 years. The aftertax discount rate is 6.2 percent. The annual depreciation tax shield is $1,760 and the after-tax annual lease payment (i.e., including the lease payment tax-shield) is $6,800. What is the value of the lease? Should the firm purchase the asset via debt-financing or sign a long-term financial lease agreement?

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Busiyijide Busiyijide · Answer 1 · 2020-05-08T09:49:03+02:00

Answer:

Explanation:

Value of Lease = P V of Lease + P V of Tax Shield on Annual Dep - P V of Purchase Cost

P V of Lease = Lease payment × PVAF(r%, n)

= $ 6800 × PVAF (6.2%, 3)

= $ 6800 × 2.6632

= $18109.43

PV of Tax shield on Annual Dep

= Annual Taxshield on Dep × PVAF(r%, n)

= $ 1760 × PVAF(6.2%, 3)

= $4687.15

Value of Lease = PV of Lease + PV of Tax Shield onAnnual Dep - PV of Purchase Cost

= $18109.43 + $4687.15 - $ 22000

= $ 22796.58 - $ 22000

= $ 796.58