Hillary is in the leasing business and faces a marginal tax rate of 35 percent. She has leased equipment to Whitewater Corporation for several years. Hillary bought the equipment for $50,000 and claimed $20,000 of depreciation deductions against the asset. The lease term is about to expire and Whitewater would like to acquire the equipment. Hillary has been offered two options to choose from:
Like-kind exchange : Whitewater would provide Hillary with like-kind equipment. The like-kind equipment has a fair market value of $35,000.
Installment sale : Whitewater would provide Hillary with two payments of $19,000. She would use the proceeds to purchase equipment that she could also lease.
Ignoring time value of money, which option provides the greatest after-tax value for Hillary, assuming she is indifferent between the proposals based on nontax factors?