Question

Hatwick Technology is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $10,200 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 34%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 2?

		-$9,724.00
		$8,480.00
		-$9,246.00
		$8,858.00
		-$1,040.00

Answer 1

After tax cash flow from leasing in Year 2
	Year 2
Lease payments	-$10,200.00
Tax savings @ 34%	$3,468.00
After tax cash flow from leasing in Year 2	-$6,732.00
After tax cash flow from Purchasing in Year 2
	Year 2
Tax saving due to depreciation [$8800*34%]	$2,992.00
After tax cash flow from Purchasing in Year 2	$2,992.00
The after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 2 = -$6732 - $2992 = -$9724
Working
Depreciation per year using straight line method = $44000 / 5 years = $8800