Question

Airgas Corporation is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $40,000 per year with the first payment occurring immediately. The equipment would cost $185,000 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%. 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 $6,000 (ignoring any possible risk differences)?

$3,155.91

-$7,628.55

-$8,062.88

$5,376.25

-$6,410.49

Answer 1

Solution :

The NPV of the lease relative to the purchase is = - $ 3,155.9145

= - $ 3,155.91 ( when rounded off to two decimal places )

Thus the solution is option 1 = - $ 3,155.91

Note : The discount rate used in the solution is the after tax discount rate.

As per the information given in the question

Discount rate = 6 % ; Tax rate = 25 % = 0.25 ;

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

= 6 % * ( 1- 0.25 ) = 6 % * 0.75 = 4.5 %

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