Question

Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? (Hint: remember back to our bond pricing concepts and calculate the payment of the bond vs. the lease payment; loan payment - lease payment )

Answer 1

Answer:

$207,215

Explanation:

Loan Payment :

5 years, Loan = $6,000,000, Interest rate = 10%, Each payment = $1,790,000

using a financial calculator, N = 5, 1/Y = 10%, PV = - 6,000,000, FV = 0,

Calculating, PMT = $1,582,725

Therefore, difference = $1,790,000 - $1,582,725 = $207,215