Jenkins Corporation wants to acquire a $200,000 computer. Jenkins has a 40 percent marginal tax rate. If

Question:

Jenkins Corporation wants to acquire a $200,000 computer. Jenkins has a 40 percent marginal tax rate. If owned, the computer would be depreciated on a straight-line basis to a book salvage value of $0. The actual cash salvage value is expected to be $20,000 at the end of 10 years. If the computer is purchased, Jenkins could borrow the needed funds at an annual pretax interest rate of 10 percent. If purchased, Jenkins will incur annual maintenance expenses of $1,000. These expenses would not be incurred if the computer is leased. The lease rate would be $28,000 per year, payable at the beginning of each year. Jenkins’ weighted after-tax cost of capital is 12 percent.

a. Compute the net advantage to leasing.

b. In general, what effect would the use of accelerated depreciation, such as MACRS, have on the answer to part a?

c. What alternative, leasing or owning, should be chosen?

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