10) Neighborhood Savings Bank is considering leasing $100,000 worth of computer equipment. A 4 year lease would require payments in advance of $22,000 per year. The bank does not currently pay income taxes and does not expect to have to pay income taxes in the foreseeable future. If the bank purchased the computer equipment, it would depreciate the equipment on a straight-line basis down to an estimated salvage value of $20,000 at the end of the 4th year. The bank's cost of secured debt is 14%, and its cost of capital is 20%. Calculate the net advantage to leasing. Years: 4 Loan amount: $100,000 Cost of Debt 14.00% Cost of Capital 20.00% Lease Payment $22,000 Salvage Value $20,000 Depreciation per year = Cost-$20,000/4 = $80,000/4 = $20,000 / year Cost of Owning Year 1 Year 2 Year 3 Year 4 Computer Cost -$100,000 Interest -$14,000 -$14,000 -$14,000 -$14,000 Residual Value (yr4) $20,000 Net Cash Flow -$14,000 -$14,000 -$14,000 -$94,000 PV of Cash Flow 20% $74,792 Cost of Leasing Total Lease Payment -$22,000 -$22,000 -$22,000 -$34,000 -$100,000 Net Cash Flow -$22,000 -$22,000 -$22,000 -$34,000 PV of Cash Flow 14% $71,190 Net Advantage to Leasing (NAL) = PV Cost of Owning ' PV Cost of Leasing NAL = $74,792 - $64,086 = $3,602 NAL = $3,602
10) Neighborhood Savings Bank is considering leasing $100,000 worth of computer equipment. A 4 year lease would require payments in advance of $22,000 per year. The bank does not currently pay income taxes and does not expect to have to pay income taxes in the foreseeable future. If the bank purchased the computer equipment, it would depreciate the equipment on a straight-line basis down to an estimated salvage value of $20,000 at the end of the 4th year. The bank's cost of secured debt is 14%, and its cost of capital is 20%. Calculate the net advantage to leasing. Years: 4 Loan amount: $100,000 Cost of Debt 14.00% Cost of Capital 20.00% Lease Payment $22,000 Salvage Value $20,000 Depreciation per year = Cost-$20,000/4 = $80,000/4 = $20,000 / year Cost of Owning Year 1 Year 2 Year 3 Year 4 Computer Cost -$100,000 Interest -$14,000 -$14,000 -$14,000 -$14,000 Residual Value (yr4) $20,000 Net Cash Flow -$14,000 -$14,000 -$14,000 -$94,000 PV of Cash Flow 20% $74,792 Cost of Leasing Total Lease Payment -$22,000 -$22,000 -$22,000 -$34,000 -$100,000 Net Cash Flow -$22,000 -$22,000 -$22,000 -$34,000 PV of Cash Flow 14% $71,190 Net Advantage to Leasing (NAL) = PV Cost of Owning ' PV Cost of Leasing NAL = $74,792 - $64,086 = $3,602 NAL = $3,602
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 4P
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10) Neighborhood Savings Bank is considering leasing $100,000 worth of computer equipment. A 4 year lease would require payments in advance of
$22,000 per year. The bank does not currently pay income taxes and does not expect to have to pay income taxes in the foreseeable future. If the
bank purchased the computer equipment, it would depreciate the equipment on a straight-line basis down to an estimated salvage value of $20,000 at
the end of the 4th year. The bank's cost of secured debt is 14%, and its cost of capital is 20%. Calculate the net advantage to leasing.
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