1 answer

Airmax is considering leasing a new equipment. The lease lasts for 5 years. The lease calls...

Question:

Airmax is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $11,300 per year with the first payment occurring immediately. The equipment would cost $44,000 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 0?

$35,525

$44,000

$11,300

$32,700

$27,500


Answers

Solution :

The after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0 is = $ 35,525

Thus the solution is Option 1

The discount rate used in the solution is the after tax discount rate.

As per the information given in the question we have

Discount rate = 6 % ; Tax rate = 25 % = 0.25

Thus, after tax discount rate = Discount rate * ( 1 - Tax rate )

= 6 % * ( 1- 0.25 ) = 6 % * 0.75 = 4.5 %

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution.

5.04.2019 - Excel FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW Statement showing calculation of after tax cash flow

.

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