Question

A company can purchase some equipment for $2,000,000 or lease it for $410,000 at the beginning of each of the next 6 years. If the firm's before-tax cost of debt is 10% and its marginal tax rate is 25%, what is the present value cost of leasing this equipment? O $1,443,358 O $1,473,167 O $1,551,610 O $2,068,813

Answer 1

The present value is computed as follows:

Present value = Annual amount x [ (1 – 1 / (1 + r)ⁿ) / r ] x (1 + r)

r is computed as follows:

= 10% x (1 - 0.25)

= 7.5% or 0.075

So, the amount will be as follows:

= $ 410,000 x [ (1 - 1 / (1 + 0.075)⁶ / 0.075 ] x 1.075

= $ 410,000 x 4.69384642 x 1.075

= $ 2,068,813

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