Question

Sparrow Corporation is considering the acquisition of an asset for use in its business over the next five years. However, Sparrow must decide whether it would be better served by leasing the asset or buying it. An appropriate asset could be purchased for $15,000, and it would qualify as a three-year asset under the MACRS classification. Assume that the election to expense assets under § 179 is not available, that any available additional first-year depreciation is not claimed, and that the asset is not expected to have a salvage value at the end of its use by Sparrow. Alternatively, Sparrow could lease the asset for a $3,625 annual cost over the five-year period. If Sparrow is in the 21% tax bracket, would you recommend that Sparrow buy or lease the asset? In your calculations, assume that 10% is an appropriate discount factor.

Answer 1

ANSWER- sparrow corporation is considering the acuisiacqui of an asset for use in its business over the next five year .

there is two alternative first is purchase and second is give the lease . In the given situation following handwritten answer is given below.
Answers Sparrow acquisition of over the Hext two option Corporation is considering the an asset for use in it's business five year. Available. Either furchase of leath - 0 Purchere Cast = $ 15,000 year=3 Assume > That the election the expenses. asset's Under Section 17g is not available that no Aeklifinal fast-year definiciahugis ullbued-to-claim the . Alternative =) Sparrow Could lease - asset Cashflow befer tax = $3625 leni tax (761.25) Cashflow Affertesa $ 886.3.75 fuerit value Annuty feacher for 5 year_Rate 10% 2863.75 X 3.79078_=$ 10855.86 Notes in the the given alternative if Sparrow give Lease than annual Cash How $10855 overall Leate term and cut flow Purchase oftion is one cash out flow for 3 year. So lease is the best oftion.
in the above the factors formula for present value annuity factor is ({1/1+R}.