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?

What is the after-tax cash flow from leasing (relative to purchasing) in years 1 through 5?

Answer 1

After-tax cash flow from leasing (relative to purchasing) in year 0

Saving in purchase cost.....1050000

Cash flow year 0...............1050000

After-tax cash flow from leasing (relative to purchasing) in year 0 is $1050000

after-tax cash flow from leasing (relative to purchasing) in years 1 through 5

Annual lease cost..............-300000

Add: tax benefit of lease....102000
Cost (300000*34%)

Less: lost tax benefit of Depreciation

(1050000/5)*34%............-71400

After-tax cash flow .. .......-126600
  
after-tax cash flow from leasing (relative to purchasing) in years 1 through 5 is -$126,600