Answer:
-$51,566.
Explanation:
So, we are given the following parameters in the question above;
Cost of equipment = $1.2 million, pre-tax cost of borrowed funds = 8 percent, tax rate = 32 percent and the equipment can be leased for = $242,500 a year.
Step one : Calculate the After-Tax lease payment .
The After-Tax lease payment = ($242,500) × (1 - 0.32) = $164,900.
Step two: Calculate the Annual Depreciation Tax-Shield.
Annual Depreciation Tax-Shield = ($1,200,000/7) × (0.32) = $54,857.
Step three: Calculate the After-Tax Discount Rate.
The After-Tax Discount Rate = 0.08 × (1 - 0.32) = 5.44%.
Step four: Calculate the Net Advantage to Leasing.
The Net Advantage to Leasing = $1,200,000 - ($164,900 + $54,857.14) × (PVIFA 5.44%, 7).
= -$51,566
