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:

Retirement

The period in life when one chooses to permanently leave the workforce behind, usually upon reaching a certain age or financial standing.

Compounded Semi-Annually

A method where interest is calculated and added to the principal at six-month intervals, resulting in interest on interest.

Annuity

A series of equal payments at regular intervals.

Semi-Annual Payments

Payments made twice a year, often used in the context of loans, bonds, or other financial instruments.