Question
United Savings Bank (USB) is considering whether to lease or buy a building. If they buy, they will pay $1,600,000, depreciate straight line to $800,000
United Savings Bank (USB) is considering whether to lease or buy a building. If they buy, they will pay $1,600,000, depreciate straight line to $800,000 over 5 years, and expect to be able to sell the building for $1,000,000 at the end of 5 years. If they lease, they will pay $350,000 at the beginning of each of the next 5 years. The cost of capital for this building (required return on the asset) is 11%, USB's cost of debt is 8% before tax, and its tax rate is 40%. Calculate the net advantage to leasing this space for USB.NOTEthat the expected sale price (salvage) for the building at the end of 5 years is not the same as the terminal price in the depreciation schedule.
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