The Burger Joint is considering either leasing or buying a new freezer unit

Accounting Nov 21, 2020

The Burger Joint is considering either leasing or buying a new freezer unit. The lessor will charge $13,300 a year for a 4-year lease. The purchase price is $38,000. The freezer has a 4-year life after which time it is expected to have a resale value of $12,000. The Burger Joint uses straight-line depreciation, borrows money at 7.5 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next 5 years. What is the net advantage to leasing?

Expert Solution

Present value of annuity= payment per period * [1-(1+i)^-n]/i

here,

i = interest rate per period

n = number of periods

Present value of lease payments

= 13300 * [1 - (1+7.5%)^-4]/7.5%

= $44,546.04

NAL (disadvantage)= 38000- $44,546.04

= -6546.04

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