please point me in the right direction to begin. Thanks!
Your small business needs to buy new office furniture for your new headquarters. You have the option of leasing the furniture, or buying the furniture. You can purchase the furniture for $15,000 per year, or lease the same furniture for $5,000 per year for the next four years.
Your company has a marginal tax rate of 40%. Depreciation will amount to $3,750 per year and the furniture will be replaced after 4 years. If your company buys the furniture, they will borrow at 7%.
Required:
1.Calculate the total cost for both options.
2.Leasing vs. buying: which is the best option for your small business and why?
can yiu help me with this asignment
To calculate the total cost for both options, we need to consider the costs associated with each choice.
For the leasing option:
The cost of leasing the furniture for each year is $5,000. Since the lease is for four years, the total cost of leasing would be $5,000 multiplied by 4, which equals $20,000.
For the buying option:
The cost of purchasing the furniture is $15,000 per year. Since the furniture will be replaced after 4 years, the total cost of purchasing would be $15,000 multiplied by 4, which equals $60,000.
Now, let's consider the tax benefits and depreciation. The depreciation amount is $3,750 per year, and since the furniture will be replaced after 4 years, the total depreciation would be $3,750 multiplied by 4, which equals $15,000.
For the buying option, the company can benefit from tax deductions based on the depreciation. The tax deduction amount is given by the formula: Tax deduction = Depreciation × Marginal tax rate. Here, the marginal tax rate is 40%.
Therefore, the tax deduction for the buying option would be $15,000 multiplied by 40%, which equals $6,000.
To calculate the net cost, we subtract the tax deduction from the total cost for the buying option:
Net Cost for buying = Total Cost for buying - Tax Deduction
= $60,000 - $6,000
= $54,000
Now, let's compare the total cost of both options:
Total Cost for leasing: $20,000
Net Cost for buying: $54,000
Based on the calculations, the leasing option has a total cost of $20,000, while the buying option has a net cost of $54,000.
To determine the best option for your small business, consider the financial implications and long-term plans. If your business is in need of flexibility and does not want to bear the cost of purchasing and maintaining the furniture long-term, leasing may be the better option. However, if your business has the financial resources and intends to use the furniture for an extended period, buying may provide better overall value, especially considering the tax benefits and potential salvage value after use.
Additionally, it's always advisable to consult with a financial advisor or accountant to evaluate the specific circumstances and make an informed decision based on your company's financial goals and objectives.