A Company is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $41,000 per year with the first payment occurring immediately. The equipment would cost $192,000 to buy and would be straight-line depreciated to a zero salvage value over 5 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6%. 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 2?
|
$32,500 |
||
|
-$40,350 |
||
|
-$41,000 |
||
|
$27,500 |
||
|
-$42,750 |
-$40,350
| Lease Option: | ||||||
| After tax lease rental in year 2 | = | Before Tax Lease rental*(1- Tax Rate) | = | -41000*(1-0.25) | = | $ -30,750 |
| Lost Depreciation tax Shield | = | Depreciation*Tax rate | = | -38400*25% | = | $ -9,600 |
| After tax cash flow in year 2 | $ -40,350 | |||||
| Working: | ||||||
| Depreciation | = | (Cost - Salvage Value)/Useful life | ||||
| = | (192000-0)/5 | |||||
| = | $ 38,400 |
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