47) Doris and Boris are considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If they purchase the asset, the cost will be $18,000. They can borrow funds for three years at 10% interest. There will be maintenance expenses of $1,200 per year, and they will use the three-year MACRS for depreciation (see table below). Their tax rate is 40%. Use a discount rate of 8%. The other alternative is to sign an operating lease with payments of $6,800 for the three years, and a buy out at the beginning of the fourth year of $4,200. Which alternative should be selected based on minimizing the present value of after-tax costs? (Show all your work!!) Year Payment + Maintenance - Tax shield - After Tax Cost Present Value @ 8% 1 $7,238 2 3 Depreciation Base Depreciation Year 1 2 3 Depreciation Percentage .33 .45 .15 Amortization table Beginning Balance $18,000 Interest @10% Annual Payment $7,238 Principal Ending Balance Year 1 2 3 Total Year Depreciation + Interest + Maintenance = Deductions x Tax Rate = Tax Shield 1 2 3 Lease After Tax Cost Present Value @ 8% Year Payment 1 2 47) Doris and Boris are considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If they purchase the asset, the cost will be $18,000. They can borrow funds for three years at 10% interest. There will be maintenance expenses of $1,200 per year, and they will use the three-year MACRS for depreciation (see table below). Their tax rate is 40%. Use a discount rate of 8%. The other alternative is to sign an operating lease with payments of $6,800 for the three years, and a buy out at the beginning of the fourth year of $4,200. Which alternative should be selected based on minimizing the present value of after-tax costs? (Show all your work!!) Year Payment + Maintenance - Tax shield - After Tax Cost Present Value @ 8% 1 $7,238 2 3 Depreciation Base Depreciation Year 1 2 3 Depreciation Percentage .33 .45 .15 Amortization table Beginning Balance $18,000 Interest @10% Annual Payment $7,238 Principal Ending Balance Year 1 2 3 Total Year Depreciation + Interest + Maintenance = Deductions x Tax Rate = Tax Shield 1 2 3 Lease After Tax Cost Present Value @ 8% Year Payment 1 2