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