Smith Meats Is Trying to Decide Whether to Lease or Buy

Multiple Choice

Smith Meats is trying to decide whether to lease or buy some new equipment. The equipment costs $62,000, has a 3-year life, and will be worthless after the 3 years. The pre-tax cost of borrowed funds is 9 percent and the tax rate is 35 percent. The equipment can be leased for $22,500 a year. What is the net advantage to leasing assuming the firm is allowed to use straight-line method to account for depreciation?

A) $2,970
B) $3,272
C) $3,308
D) $3,369
E) $3,411