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.

d. Determine the depreciation schedule (see Table 12-9).

Short answer

The depreciation charged in the first year is $3,330, the second year is $4,450, the third year is $1,480, and the fourth year is $740.

Step-by-step solution

Information provided in the question

Cost of asset = $10,000

Lease term = 4 years

Depreciation schedule

Year	Depreciation base	Depreciation percentage	Depreciation
1	$10,000	0.333	$3,330
2	$10,000	0.445	$4,450
3	$10,000	0.148	$1,480
4	$10,000	0.074	$740