Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
metro is thinking of leasing a new material
metro is thinking of leasing a new material. The lease lasts for 8 years. The lease calls for 8 payments of $262,000 per year with the first payment taking place immediately. The material would cost 1,800,000 to buy and would be straight-line depreciated to a 0 salvage value over 8 years. The firm can borrow at a rate of 5 percent. The corporate tax rate is 25 percent. The actual pre-tax salvage value is 52,000. What would the NPV of the lease relative to the purchase be?
Expert Solution
Net advantage to leasing (NAL) = Purchase price - PV of after-tax lease payment - PV of depreciation tax shield - PV of after-tax salvage value
Discount rate = after-tax cost of debt = 5%*(1-25%) = 3.75%
After-tax lease payment = lease payment*(1-Tax rate) = 262,000*(1-25%) = 196,500
PV of after-tax lease payment: PMT = 196,500; N = 8; rate = 3.75%; Type = 1 (or Beg.), solve for PV.
PV of after-tax lease payment = 1,386,877.42
Purchase price = 1,800,000; Depreciation (D) = PP/8 = 1,800,000/8 = 225,000
Depreciation tax shield p.a. (DTS) = D*Tax rate = 225,000*25% = 56,250
PV of DTS: PMT = 56,250; N = 8; rate = 3.75%, solve for PV.
PV of DTS = 382,657.25
After-tax salvage value = salvage value*(1-Tax rate) = 52,000*(1-25%) = 39,000
PV of after-tax salvage value = 39,00/(1+3.75%)^8 = 29,050.91
NAL = 1,800,000 - 1,386,877.42 - 382,657.25 - 29,050.91 = 1,414.42 (Answer)
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
