535Handout_7

535Handout_7 - IS/PM 535 Handout #7 The text below is from...

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1 IS/PM 535 Handout #7 The text below is from section 21.7 “Lesase-Versus_Purchase Analysis” of Chapter 21 – Leasing in Handbook of Budgeting, 4e by Robert Rachlin (ed.), John Wiley & Sons, 1999. The text is available on DePaul Library, 24x7 books. This printed version is for classroom use. Lesase-Versus_Purchase Analysis Lease-versus-purchase analysis begins with the assumption that the investment analysis (capital budgeting) decision has been made in favor of acquiring a piece of equipment. The next step requires a financing decision—lease-versus-purchase analysis. Exhibit 21.14 illustrates the analysis between lease-versus-purchase lease arrangements. Exhibit 21.14. Lease-versus-purchase analysis Mega Corporation recently decided to obtain a computer with a retail value of $400,000. The company can either obtain a loan to purchase the computer, or it can be leased. Mega Corporation is in the 40% tax bracket. (a) Relevant Information for Purchase Alternative. A bank loan must be obtained for the purchase price of $400,000 less a down payment of $100,000. The balance ($300,000) is to be financed over 36 months with monthly payments in arrears of $9,680, an implicit borrowing rate of about 10%. Sales tax is 6% and will be paid at the time of purchase. The bank requires a loan origination fee of 2% of the loan proceeds. Each monthly payment is composed of both principal and interest, the latter being tax deductible as follows: Year 1 $25,939 Year 2 $16,492 Year 3 $ 6,055
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2 Depreciation expense on the computer will be straight line for book purposes and Modified Accelerated Cost Recovery System (MACRS) with a five-year life for tax. The
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This note was uploaded on 10/11/2011 for the course ECT ect535 taught by Professor Susichan during the Fall '11 term at DePaul.

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535Handout_7 - IS/PM 535 Handout #7 The text below is from...

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