Monster Magnet Manufacturing is considering leasing some equipment. The annual lease payment would be $450,000 per year for 7 years. The appropriate interest rate is 10 percent and the company is in the 38 percent tax bracket.
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What reduction in debt capacity would occur if the company signs the lease? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Reduction in debt capacity | $ |
| Reduction of debt capacity = Present value of yearly net cash outflow of leasing option | |||||||||
| Yearly net Cash outflow from leasing option | |||||||||
| Lease payment | $450,000.00 | ||||||||
| Less : Tax savings @ 38% of lease payment | $171,000.00 | ||||||||
| Net Cash outflow | $279,000.00 | ||||||||
| Present value of yearly net cash outflow of leasing option = Net cash outflow x Annuity factor @ 10% for 7 years | |||||||||
| Annuity factor @ 10% for 7 years = [1 - 1.10^-7]/0.10 = 4.868419 | |||||||||
| Present value of yearly net cash outflow of leasing option = $2,79,000 x 4.868419 | |||||||||
| Present value of yearly net cash outflow of leasing option = $13,58,288.85 | |||||||||
| Reduction of debt capacity = $13,58,288.85 | |||||||||
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