Question

Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL) for the lessee, in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

Answer 1

To determine the net advantage to leasing for Kohers Inc., it's essential to compare the present value of leasing and ownership costs, taking into account depreciation, interest, tax effects, and maintenance savings. Additional information such as the discount rate would be necessary for an accurate calculation.

Step-by-step explanation:

The student is asking about the net advantage to leasing (NAL) for Kohers Inc., which is a calculation to determine whether leasing or purchasing equipment is more financially sound. To find the NAL, we will compare the present value of leasing the tools with the present value of buying and owning them, taking into account the associated costs, depreciation, interest, and tax implications. Here's a simplified outline of how to approach this problem in thousands (deleting 3 zeros from the amounts):

• Calculate the present value of the lease payments.
• Calculate the present value of loan payments for purchasing the tools, including interest.
• Account for tax savings from depreciation.
• Include the maintenance cost savings if leasing.

To provide an accurate calculation, we would need additional information such as the method for calculating the present value and the discount rate, if any. However, the given data does not allow for a complete determination of the NAL. For full analysis, one would perform the steps outlined and subtract the present value of lease payments from the adjusted present value of ownership to determine the Net Advantage to Leasing.