P-5 (BE) GLN To lease or borrow?

Io =
Lt (end of pd.)
1,000,000
320,000 $
Asset life=
No. of Lt
3 yrs
3 payments
1-1
3 year loan Intt rate= 0.1400
RV = - T = 0.34 Kd = 0.0924
Dep = 3 years MACRS class Cost of leasing?
Mnt = - in adv Cost of owning=?

Dep = 3 years MACRS class

Year 1 2 3 4 5 6 Total
Dep= 0.3300 0.4500 0.1500 0.0700 1.0000
Dep= 330,000 450,000 150,000 70,000 0.0 0.0 1,000,000

Cost of leasing? 0.0924

End of year Lt Tax shld Lt(1-T) PVIF 9.24% PV of outflow
1 320,000 108,800 211,200 0.9154 193,336
2 320,000 108,800 211,200 0.8380 176,983
3 320,000 108,800 211,200 0.7671 162,013
200,000 0.7671 153,421

Tax shld year 0 Total 685,752

c
Cost of purchasing the machinery after the lease expires.

Cost of owning
A= $loan/ PVIFA(14%,3yrs))
1,000,000 2.3216 2.3216 = 430,737.4
Year P+I Intt Prin P Bal
1 430,737.4 140,000.0 290,737.4 709,262.6
2 430,737.4 99,296.8 331,440.7 377,821.9
3 430,737.4 52,895.1 377,842.4 (20.4)
Copyright © by R. S. Pradhan All rights reserved.
 1-2
cost of owning calculation: 0.0924
Year Payment Mnt Total Interest Dep Mnt Tax shield CF after T PVIF 9.24% PV
1 430,737 50,000 480,737 140,000 330,000 50,000 176,800 303,937 0.9154 278,229
2 430,737 50,000 480,737 99,297 450,000 50,000 203,761 276,977 0.8380 232,102
3 430,737 50,000 480,737 52,895 150,000 50,000 85,984 394,753 0.7671 302,817
- 0.7671 -
Residual value Cost of owning = 813,149

Copyright © by R. S. Pradhan All rights reserved.