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 annual depreciation if you purchase the widget (absolute value)?

$6,000

$6,350

$1,700

$2,000

None of the above

What is the accumulated depreciation over the first three years if you purchase the widget (absolute value)?

$6,000

$6,350

$1,700

$2,000

None of the above

What is the annual tax savings from depreciation if you purchase the widget (absolute value)?

$1,700

$900

$300

$2,000

None of the above

What is the present value of the after-tax terminal value if you purchase the widget (absolute value)?

		$14,262
		$5,584
		$766
		$4,971
		None of the above