Question

Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be \(10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.

The other alternative is to sign two operating leases, one with payments of \)2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.

c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan—due to rounding.)

Short answer

The loan amount repaid in the first year is $2,092, in the second year is $2,343, in the third year is $2,624, and in the fourth year is $2,939.

Step-by-step solution

Information provided in the question

Annual payment of loan =$3,292

Lease term = 4 years

Interest rate = 12%

Amortization schedule

Year	Beginning balance	Annual payment	Annual interest	Repayment on principal	Ending balance
1	$10,000	$3,292	$1,200	$2,092	$7,908
2	$7,908	$3,292	$949	$2,343	$5,565
3	$5,565	$3,292	$668	$2,624	$2,941
4	$2,941	$3,292	$353	$2,939	$2