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The Tasha Corporation needs a new pipe-boring machine that can be purchased for $10,000.  The machine will...

The Tasha Corporation needs a new pipe-boring machine that can be purchased for $10,000.  The machine will be depreciated using MACRS with a 5-year class.  Tasha will use the machine for 5 years and then sell it with an anticipated salvage value of $2000. A maintenance contract will be purchased at a cost of $500 per year with payments made in advance. Tasha can obtain a bank loan with an interest rate of 7.5% and the company’s tax rate is 34%.

(EXCEL TEMPLATE) 7.) Now suppose that Johnson Leasing Corporation has offered to lease the same machine to Tasha for lease payments of $3,000 paid at the end of each of the next five years.  Maintenance is included in the annual lease amount.  The lease satisfies IRS rules to qualify for a guideline lease.  What is the NPV of leasing?

7.  What is the NPV of Leasing?
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Lease Pmt
Tax Savings
Total Cash Flow
NPV-Leasing
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Answer #1

Present value = future value / (1 + discount rate)number of years

Here the discount rate is the after-tax cost of loan, since lease payments and interest payments are tax-deductible.

After tax cost of loan = pre tax cost of loan * (1 - tax rate) = 7.5% * (1 - 34%) = 4.95%

total cash flow in each year = lease payment - tax savings

The salvage value is not applicable since Tasha does not own the machine.

NPV is -$8,584.23

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