Question

Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 5 payments of $300,000 per year. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%.

What is the after-tax cash flow from leasing (relative to purchasing) in year 0?

Group of answer choices

1,050,000

$852,000

$495,000

$300,000

Answer 1

>>>>

If Lease payments are at the beginning of year

Cost of robotic sprayer = $1,050,000

Lease payment = $300,000

Tax rate = 34%

After tax cost of lease payment = $300,000 * (1 - 34%) = $198,000

After tax cash flow from leasing (relative to purchasing ) in year 0 = Cost of robotic sprayer - After tax cost of lease payment

= $1,050,000 - $198,000

= $852,000

After tax cash flow from leasing (relative to purchasing ) in year 0 is $852,000

>>>>

If Lease payments are at the Ending of year

Cost of robotic sprayer = $1,050,000

After tax cash flow from leasing (relative to purchasing ) in year 0 = Cost of robotic sprayer

= $1,050,000

After tax cash flow from leasing (relative to purchasing ) in year 0 is $1,050,000