Question

Lexmark Corporation is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $109,000 per year with the first payment occurring immediately. The equipment would cost $712,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6.5%. The corporate tax rate is 25%. The actual pre-tax salvage value is $50,000. What would the NPV of the lease relative to the purchase be?

		-$13,418.59
		-$15,096.83
		$10,256.37
		$13,628.39
		$16,200.15

Answer 1

Solution :

The NPV of the lease relative to the purchase is = - $ 15,096.83

The solution is Option 2 = - $ 15,096.83

Note :

The discount rate used in the solution is the after tax borrowing rate of 4.875 %

As per the information given in the question we have

Borrowing rate = 6.50 % ; Tax rate = 25 % = 0.25

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

= 6.50 % * ( 1 - 0.25 ) = 6.50 % * 0.75 = 4.875 %

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