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 NPV of the lease relative to the purchase?

		$1,120.00
		-$526.34
		-$857.15
		-$1,475.28
		$469.43

Answer 1

Annual cash outflow for leasing = lease rental * (1-tax rate) = 10200*(1-.34) = 6732

Please see the below table for cash outflow if the company purchases the item:

The Company would get a tax benefit for the interest payment and the depreciation. Hence, the cash outflow would be net of this tax benefit. Present value is calculated using the after tax rate i.e. 6%*0.66.

Hence, the answer is -$526.3