Homework Answers
A: NPV of purchase= C0+ PV of annual tax shield on depreciation (100000*35%/5)
= -100000+7000*(1-1/1.15^5)/0.15
=-100000+23465.09
= -76534.91
NPV of annual lease payments after tax = (25000*(1-0.35))*(1-1/1.15^5)/0.15
=-54472.52
Lease is better since it has higher NPV
B: : NPV of purchase= C0+ PV of annual tax shield on depreciation which is (350000*40%/5)
= -350000+28000*(1-1/1.1^5)/0.1
= -243857.97
NPV of annual lease payments after tax = (100000*(1-0.4))*(1-1/1.1^5)/0.1
=-227447.206
Lease is better since it has higher NPV
C: NPV of purchase= C0+ PV of annual tax shield on depreciation which is (500000*25%/5)
= -500000+25000*(1-1/1.07^5)/0.07
= -397495.06
NPV of annual lease payments after tax = (125000*(1-0.25))*(1-1/1.07^5)/0.07
=-384393.51
Lease is better since it has higher NPV
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