Question

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%

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