Precision Tool Is Trying to Decide Whether to Lease or Buy

question 72

Multiple Choice

Precision Tool is trying to decide whether to lease or buy some new equipment for its tool and die operations.The equipment costs $1.2 million has a 7-year life,and will be worthless after the 7 years.The pre-tax cost of borrowed funds is 8 percent and the tax rate is 32 percent.The equipment can be leased for $242,500 a year.What is the net advantage to leasing?

• A)-$51,566
• B)-$34,211
• C)$37,549
• D)$56,828
• E)$79,664

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Definitions:

General Ledger

A comprehensive set of accounts that records all financial transactions of a business, showing assets, liabilities, equity, revenue, and expenses.

Owner Withdrawals

Money or assets taken out of a business by the owner(s) for personal use.

Owner's Equity

The residual interest in the assets of a company after deducting liabilities, representing the ownership interest of shareholders or owners.

Adjusted Trial Balance

A list of all the accounts of a company, showing the balance of each after adjustments have been made for errors, omissions, or accruals.