Question

Healthsouth Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $111,000 per year with the first payment occurring immediately. The equipment would cost $724,000 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%. What is the NPV of the lease relative to the purchase?

		$8,115.44
		$11,257.63
		$9,872.66
		-$12,648.23
		-$17,041.66

Answer 1

Solution :

The NPV of the lease relative to the purchase = $ 9,872.66

The solution is Option 3 = $ 9,872.66

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