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Your firm is considering leasing a magic box. The lease lasts for 3 years. The lease calls for 4 payments if $1,000 per year with the first payment occurring at lease inception. The magic box would cot $3,600 to buy and would be straight-line depreciated to zero salvage value over 3-years. The firm can borrow at 6%, and the corporate tax rate is 30%. What is the NPV of the lease?
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Answer #1

NPV of the lease is calculated by considered two alternatives.

  • Borrow & buy asset
  • Leasing the asset

In first alternative Installment of loan,tax shield on interest and depreciation is considered.In leasing present value of lease payment is considered.

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