Question
In: Finance
A firm is considering whether to lease or buy a machine that costs $100,000. The machine...
A firm is considering whether to lease or buy a machine that costs $100,000. The machine would be kept for three years. The firm’s cost of debt is 10% and its tax rate is 40%. If the machine is owned then the company would have to pay $10,000 per year in maintenance cost (payable at the end of the year). If the machine is leased then the maintenance will be taken care of by the lessor. If leased, the lease payments would be $35,000 at time zero and at the end of each of the next three years. Assume straight-line to a salvage value of $0 three years from now.
What is the net advantage to leasing if any?
Solutions
Expert Solution
| NAL | $866.75 |
| Lease | BUY | ||||
| Year | Cash flows after tax | Cost | Tax shield | Maintenance | Net Cash flow |
| 0 | -21000 | -100000 | -100000 | ||
| 1 | -21000 | 13333.33 | -6000 | 7333.333333 | |
| 2 | -21000 | 13333.33 | -6000 | 7333.333333 | |
| 3 | -21000 | 13333.33 | -6000 | 7333.333333 | |
| After tax cost | 0.06 | ||||
| NPV of lease | ($77,133.25) | NPV of buy | ($78,000.00) | ||
| NAL | $866.75 | ||||
Workings
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