Question

a lease with a term of 5 years calls for annual payments of $2,000. the leased assetwould cost $9,000 to buy and would be depreciated straight-line to a zero-salvage valueover the 5 years. the use of the asset will result in a $5,000 cost savings per year for 5years. the actual salvage value is negligible. the firm can borrow at a rate of 10 percent. what is the net advantage of leasing if the lessee's tax rate is 20 percent?

Answer 1

According to the lease or buy decision, the company or individual should choose the option with the lowest present value when comparing the options before leasing or buying the assets. It aids in better financial management.

A) Consideration of whether to lease or purchase the asset:

What do you mean by decisions to own or lease?

DECISIONS ABOUT OWNING OR LEASING An arrangement known as leasing gives a person the use and control of an asset for a price that is paid periodically and does not involve having title to the asset. This is the decision about whether to lease the product in periodic installments or buy the asset outright.

Is leasing a decision based on money?

In the case of lease financing, lease rentals must be paid, which is similar to paying interest on borrowings, which may be required to acquire the asset. Therefore, a lease-buy decision is a financing decision that requires choosing between lease financing and debt financing.

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