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 flow from leasing relative to the after-tax cash flow from purchasing in year 6? -$98,215.00 -$105,875.00 -$110,000.00 -$92,725.00 None of the above
Following will be the Cash Flow from leasing
Year 0-7
Leas Rent = $111,000
After tax CF From leasing = ($111,000- 25% tax) = $ -83,250
Following will be the CF from Buying option:
Depreciation = $ 7,24,000/8 (as zero salvage value) = $ 90,500
after tax depreciation = $ 67,875
CF from loan financing
(Assuming loan to be paid in 8 years installment starting from year 1)
| year | Principal(a) | interest @6.5% | outstanding | interest after tax(b) | Dep after tax(c) | CF after tax(c-a-b) |
| 1 | 90500 | 47,060 | 633500 | 35295 | 67875 | -57,920 |
| 2 | 90500 | 41178 | 543000 | 30883 | 67875 | -53,508 |
| 3 | 90500 | 35295 | 452500 | 26471 | 67875 | -49,096 |
| 4 | 90500 | 29413 | 362000 | 22059 | 67875 | -44,684 |
| 5 | 90500 | 23530 | 271500 | 17648 | 67875 | -40,273 |
| 6 | 90500 | 17648 | 181000 | 13236 | 67875 | -35,861 |
| 7 | 90500 | 11765 | 90500 | 8824 | 67875 | -31,449 |
| 8 | 90500 | 5883 | 0 | 4412 | 67875 | -27,037 |
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 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 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%. The actual pre-tax salvage value...
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