Question

Scana Corporation is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $34,000 per year with the first payment occurring immediately. The equipment would cost $126,000 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 6.5%. The corporate tax rate is 25%. What is the NPV of the lease relative to the purchase if the asset had a pretax salvage value of $4,600 (ignoring any possible risk differences)?

		-$20,274.43
		-$16,783.21
		-$11,466.25
		$13,427.88
		$21,197.33

Answer 1

Solution :

The NPV of the lease relative to the purchase if the asset had a pretax salvage value of $4,600 is = - $ 20,274.43

The solution is Option 1 = - $ 20,274.43

Note :

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 = 6.5 % ; Tax rate = 25 % = 0.25

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

= 6.5 % * ( 1 - 0.25 ) = 6.5 % * 0.75 = 4.875 %

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