Fred's Garage Is Trying to Decide Whether to Lease or Buy

question 43

Multiple Choice

Fred's Garage is trying to decide whether to lease or buy some new equipment.The equipment costs $48,000 and has a 6-year life.The equipment will be worthless after the 6 years and will have to be replaced.The company has a tax rate of 34 percent,a cost of borrowed funds of 7.5 percent,and uses straight-line depreciation.The equipment can be leased for $10,600 a year.What is the amount of the aftertax lease payment?

• A)$3,286.00
• B)$6,996.00
• C)$7,862.55
• D)$8,406.16
• E)$10,928.60

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Definitions:

Depreciation Expense

The allocated amount of an asset's cost expensed over its useful life to account for wear and tear, obsolescence, or decline in value.

Car Purchase

The process of acquiring a vehicle for personal or business use, which may involve financing or leasing options.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts.