Hartwick is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $11,300 per year with the first payment occurring immediately. The equipment would cost $44,000 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 NPV of the lease relative to the purchase?
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-$3,218.66 |
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-$4,537.23 |
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$737.11 |
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$2,912.64 |
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$1,097.26 |
NPV of lease = 11,300(1-25%)*[1+PVAF(6%, 4 years)
= 8,475*4.46510
=- $37,841.77
Annual Depreciation = 44,000/5 = $8,800
The firm will get tax savings each year on depreciation in buy
NPV = 8,800*25%*PVAF(6%, 5 years) – 44,000
= 2,200*4.21236 – 44,000
= -$34,732.80
Hence, NPV of the lease relative to the purchase = 34,732.80 – 37,841.77
= -$3,109
i.e. -$3,218.66 (approx.)
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