United Savings Bank (USB) is considering whether to lease or buy a building. If they buy, they
Question:
United Savings Bank (USB) is considering whether to lease or buy a building. If they buy, they will pay $1,600,000, depreciate straight line to $800,000 over 5 years, and expect to be able to sell the building for $1,000,000 at the end of 5 years. If they lease, they will pay $350,000 at the beginning of each of the next 5 years. The cost of capital for this building (required return on the asset) is 11%, USB's cost of debt is 8% before tax, and its tax rate is 40%. Calculate the net advantage to leasing this space for USB. NOTE that the expected sale price (salvage) for the building at the end of 5 years is not the same as the terminal price in the depreciation schedule. If you don't remember how to salvage value is adjusted for taxes, you should refer back to your capital budgeting notes.
a.-$298,414.66
b.-$246,153.01
c.-$195,575.10
d.-$182,722.52
e.-$99,913.37
f.-$44,642.14
g.-$7,181.90
h.-$4,251.63
i.$4,251.63
j.$7,181.90
k.$44,642.14
l.$99,913.37
m.$182,722.52
n.$195,575.10
Cost Accounting A Managerial Emphasis
ISBN: 978-0133428704
15th edition
Authors: Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan