A B D E F G H I J K L M N P Q R S T U V W X Y Z AA AB A 1 2 3 4 5 6 7 8 9 10 Bruges Inc plans to acquire equipment with a 4-year life at a cost of $12 million (delivery and installation included). Bruges can borrow the $12 million at 12%, fully amortized over 4 years. Alternatively, Bruges can lease the equipment for 4 years at a rental charge of $4 million per year, payable at the end of the year. At the end of the term the equipment will have an estimated salvage value of $1 million. At that time Bruges plans to replace the equipment regardless of whether the firm leases or purchases it. The lease includes maintenance service, whereas if the equipment is bought, it would require maintenance provided by a service contract for $600,000 per year, payable at the end of the year. The equipment falls into the MACRS 5-year class life, and the depreciable basis is the original cost. Bruges' tax rate is 25%. Enter numbers as MILLIONS. So $4 million is $4, $600,000 is $0.6. Calculate the PV of ownership, PV of leasing, and the net advantage to leasing. 11 12 13 14 Inputs 15 New equipment cost 16 17 18 New equipment life Salvage value Annual maintenance costs Tax rate Loan interest rate After-tax cost rate Annual lease pymts 19 20 21 22 Depreciation 1 23 Depreciation rate 2 3 20% 32% 19% after-tax SV calculation 4 5 6 BV SV taxes ATSV 12% 11% 6% 24 Depreciation expense 25 Depreciation tax savings = Deprn x T 26 27 Cost of Owning Year = 0 1 2 3 4 28 Net purchase price 29 Maintenance costs 30 Maint. tax sav. = Maint x T 31 Tax savings from deprn. 32 33 34 35 36 37 38 39 After-tax salvage value Cash flows PV ownership cost Cost of Leasing Lease payments Tax savings Lease pymt xT Cash flows 40 PV of leasing 41 42 Cost Comparison 43 PV of ownership 44 PV of leasing 45 Net Advantage to Leasing (NAL) 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63