Question

You are considering leasing a piece of equipment. Compute the Present Value of Leasing Costs (after...

You are considering leasing a piece of equipment. Compute the Present Value of Leasing Costs (after taxes). The details of the lease are as follows:

Annual Lease Payments = $12,400 (due at Beginning of Year)
Lease Term = 5 Years
Corporate Tax Rate = 30%
Present Value Discount Rate = 7%

Homework Answers

Answer #1

Since we have to make lease payment at the beginning of the year cash flow of the lease will look like this

Year Lease Payment
0 12,400
1 12,400
2 12,400
3 12,400
4 12,400

Now we will calculate the Effective (Net of Tax) cost of lease

Year Lease Payment Tax Benefit (B) Effective Cost (Net of Tax) A-B
0 12,400 3720 8,680
1 12,400 3720 8,680
2 12,400 3720 8,680
3 12,400 3720 8,680
4 12,400 3720 8,680

Now we will calculate present value of there cash flows at 7%

Year Effective Cost (Net of Tax) Present Value Factor @ 7% Present Value
0 8,680 1.00 8,680.00
1 8,680 0.93 8,112.15
2 8,680 0.87 7,581.45
3 8,680 0.82 7,085.47
4 8,680 0.76 6,621.93
Total Cost 38,080.99

Present Value of Leasing Cost = 38080.99

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