Question

Asked Nov 13, 2019

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Firm X needs 1 computer. There are two options available: Firm X can buy 1 computer for 2,000; or Firm X can enter into a true-tax lease for 2 years with 600 yearly payment, the first due immediately (3 payments: at 0,1, and 2). The cost of debt for Firm X is 5%. The corporate tax equals 35%. Firm X follows a straight-line depreciation method and the economic life of the computer is 2 years. Compute which method (buying or leasing) is the best to obtain the computer.

Which alternative is best:

Answer choices:

A) Leasing

B) Buying with a loan

C) Leasing or buying are equivalent.

Step 1

**Computation of cost of leasing:**

Step 2

**Computation of cost of buying:**

Step 3

Hence, the Firm X should go for leasing because its cost is lower than cost of buying.

**Answer: (A)...**

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