Question
McAll Inc., a 40%-tax bracket firm, is considering either to own or lease an asset that costs $1,000,000. If firm borrows at 10% of interest
McAll Inc., a 40%-tax bracket firm, is considering either to own or lease an asset that costs $1,000,000. If firm borrows at 10% of interest rate and buys the asset, it will pay a $20,000 tax deductible maintenance fee at the beginning of each year for 4 years. The asset will be depreciated on a 3-year MACRS schedule (33.33%, 44.45%, 14.81%, and 7.41%) and will have a residual value of $200,000 at t = 4. If the asset is leased, the firm could obtain a 4-year lease which includes maintenance. The tax-deductible lease payments would be $260,000 at the beginning of each year.
What is the net advantage of leasing from the Lessee perspective?
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