Healthsouth Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $111,000 per year with the first payment occurring immediately. The equipment would cost $724,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6.5%. The corporate tax rate is 25%. The actual pre-tax salvage value is $15,000. What would the NPV of the lease relative to the purchase be? -$3,427.15 $2,185.31 $4,263.89 $6,349.75 -$1,056.33
Solution :
The NPV of the lease relative to the purchase = $ 2,185.31
Thus the solution is Option 2 = $ 2,185.31
Note :
The discount rate used in the solution is the after tax discount rate.
As per the information given in the question we have
Discount rate = 6.5 % ; Tax rate = 25 % = 0.25
Thus, after tax discount rate = Discount rate * ( 1 - Tax rate )
= 6.5 % * ( 1 - 0.25 ) = 6.5 % * 0.75 = 4.875 %
Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.
Healthsouth Company is considering leasing a new equipment. The lease lasts for 8 years. The lease...
Healthsouth Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $111,000 per year with the first payment occurring immediately. The equipment would cost $724,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6.5%. The corporate tax rate is 25%. What is the NPV of...
Healthsouth Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $111,000 per year with the first payment occurring immediately. The equipment would cost $724,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6.5%. The corporate tax rate is 25%. What is the after-tax cash...
Healthsouth Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $111,000 per year with the first payment occurring immediately. The equipment would cost $724,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6.5%. The corporate tax rate is 25%. What is the after-tax cash...
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