Question
In: Finance
A&D is considering leasing a new equipment. The lease lasts for 5 years. The lease calls...
A&D is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $9,700 per year with the first payment occurring immediately. The equipment would cost $41,000 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 7%. 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 2?
Solutions
Expert Solution
After tax cash flow from leasing in year 2 = Lease amount*(1-Tax)
= -9700*(1-0.25)
= -7275
After tax cash flow from purchase = Tax shield on depreciation
= 25%* 41000/5 = 2050
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