A manager has decided to buy a widget. Two alternative financing methods are available: (A) use a financial lease or (B) purchase the widget using owner financing and borrowed capital. The financial lease is a 3 year lease with annual lease payments of $6,500 paid at the beginning of each year (a lease payment is tax deductible; assume it can be claimed at the beginning of each year). The manager can buy the widget for $20,000 and sell it again in 3 years for $5,000. A bank will loan $15,000 and the loan will be fully amortized at 10% over 3 years with annual payments. The IRS will allow the widget to be depreciated over 10 years. The marginal tax rate is 15%. The manager requires at least a 10% pre-tax return on capital. Assume that the inflation rate is 0%. Should the manager buy or lease? What is the after-tax discount rate? Page 1 ANSWER: [Select ] What is the after-tax lease payment (absolute value)? ANSWER: [Select ] What is the annual depreciation if you lease the widget (absolute value)? ANSWER: [Select ] What is the tax savings from depreciation if you lease the widget (absolute value)? ANSWER: [Select ] What is the present value of the lease payment (absolute value)? ANSWER: [Select ] Page 2 What is the net present value of leasing the widget (absolute value)? ANSWER: [Select ] A What is the annuity equivalent of leasing the widet (absolute value)? ANSWER: [ Select ] A What is the after-tax terminal value if you purchase the widget (absolute value)? ANSWER: [Select ] What is the after-tax terminal value if you purchase the widget (absolute value)? ANSWER: [Select] What is the annual depreciation if you purchase the widget (absolute value)? ANSWER: [Select] What is the accumulated depreciation over the first three years if you purchase the widget (absolute value)? ANSWER: [ Select ] What is the annual tax savings from depreciation if you purchase the widget (absolute value)? ANSWER: [Select] Page What is the present value of the after-tax terminal value if you purchase the widget (absolute value)? ANSWER: [Select ] What is the present value of the tax savings from depreciation if you purchase the widget (absolute value)? ANSWER: [Select ] 4 What is the net present value of purchasing the widget (absolute value)? ANSWER: [Select ] What is the annuity equivalent of purchasing the widet (absolute value)? ANSWER: [Select ] 4 Leasing the Widget has a lower cost so you would choose to lease the Widget? ANSWER: [Select ] 4 A manager has decided to buy a widget. Two alternative financing methods are available: (A) use a financial lease or (B) purchase the widget using owner financing and borrowed capital. The financial lease is a 3 year lease with annual lease payments of $6,500 paid at the beginning of each year (a lease payment is tax deductible; assume it can be claimed at the beginning of each year). The manager can buy the widget for $20,000 and sell it again in 3 years for $5,000. A bank will loan $15,000 and the loan will be fully amortized at 10% over 3 years with annual payments. The IRS will allow the widget to be depreciated over 10 years. The marginal tax rate is 15%. The manager requires at least a 10% pre-tax return on capital. Assume that the inflation rate is 0%. Should the manager buy or lease? What is the after-tax discount rate? Page 1 ANSWER: [Select ] What is the after-tax lease payment (absolute value)? ANSWER: [Select ] What is the annual depreciation if you lease the widget (absolute value)? ANSWER: [Select ] What is the tax savings from depreciation if you lease the widget (absolute value)? ANSWER: [Select ] What is the present value of the lease payment (absolute value)? ANSWER: [Select ] Page 2 What is the net present value of leasing the widget (absolute value)? ANSWER: [Select ] A What is the annuity equivalent of leasing the widet (absolute value)? ANSWER: [ Select ] A What is the after-tax terminal value if you purchase the widget (absolute value)? ANSWER: [Select ] What is the after-tax terminal value if you purchase the widget (absolute value)? ANSWER: [Select] What is the annual depreciation if you purchase the widget (absolute value)? ANSWER: [Select] What is the accumulated depreciation over the first three years if you purchase the widget (absolute value)? ANSWER: [ Select ] What is the annual tax savings from depreciation if you purchase the widget (absolute value)? ANSWER: [Select] Page What is the present value of the after-tax terminal value if you purchase the widget (absolute value)? ANSWER: [Select ] What is the present value of the tax savings from depreciation if you purchase the widget (absolute value)? ANSWER: [Select ] 4 What is the net present value of purchasing the widget (absolute value)? ANSWER: [Select ] What is the annuity equivalent of purchasing the widet (absolute value)? ANSWER: [Select ] 4 Leasing the Widget has a lower cost so you would choose to lease the Widget? ANSWER: [Select ] 4