Problem:
Smith Corp is considering the lease of an automated production line costing $500,000 from Ace Leasing. The period of the lease will be 4 years. The welder will be depreciated under MACRS rules for a 3-year class asset. Smith's marginal tax is 30%. Annual lease payments will be $190,000. Estimated salvage value is zero.
Required:
Question: If Ace's after-tax cost of borrowing is 16%, compute the after tax cost of leasing.
Note: Provide support for rationale.