Question

Airgas Corporation is considering leasing a new equipment. The lease lasts for 5 years. The lease...

Airgas Corporation is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $40,000 per year with the first payment occurring immediately. The equipment would cost $185,000 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 25%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 2? (Hint: For this and following questions, review problem 6 in the practice problems of Chapter 21)

$31,450

-$44,150

-$42,750

$29,500

-$39,250

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