Question

Witten Entertainment is considering buying a machine that costs $556,000. The machine will be depreciated over four years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $150,000. The company can issue bonds at an interest rate of 7 percent. The corporate tax rate is 21 percent.

What is the NAL of the lease? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Solution :

The NAL of the lease = $ 38,682.35

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 = 7 % ; Tax rate = 21 % = 0.21

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

= 7 % * ( 1 - 0.21 ) = 7 % * 0.79 = 5.53 %

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