Question: Sparrow Corporation is considering the acquisition of an asset for
Sparrow Corporation is considering the acquisition of an asset for use in its business over the next five years. However, Sparrow must decide whether it would be better served by leasing the asset or buying it. An appropriate asset could be purchased for $15,000, and it would qualify as a three-year asset under the MACRS classification. Assume that the election to expense assets under § 179 is not available, that any available additional first-year depreciation is not claimed, and that the asset is not expected to have a salvage value at the end of its use by Sparrow. Alternatively, Sparrow could lease the asset for a $3,625 annual cost over the five-year period. If Sparrow is in the 34% tax bracket, would you recommend that Sparrow buy or lease the asset? In your calculations, assume that 10% is an appropriate discount factor.
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