Question

Nodhead College needs a new computer. It can either buy it for $320,000 or lease it from Compulease. The lease terms require Nodhead to make six annual payments (prepaid) of $76,000. Nodhead pays no tax. Compulease pays tax at 40%. Compulease can depreciate the computer for tax purposes straight-line over five years. The computer will have no residual value at the end of year 5. The interest rate is 6%.

a. What is the NPV of the lease for Nodhead College? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number.)

b. What is the NPV for Compulease? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

c. What is the overall gain from leasing? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number.)

PLEASE PROVIDE EXCEL WITH EXPLANATION

Answer 1

Solution:

1.NPV for Nodhead College

Since all the payment are made on prepaid basis,that means at the begining of the year,hence first payment of $76,000 is not required to be discounted.

Discount rate=6%

NPV=Present value of cash Inflows-Present value of cash ouflows

=$0-[$76000+76000/(1+.06)+76000*(1+.06)^2+76000*(1+.06)^4+76000*(1+.06)^5]

=-$396,139.65

thus,NPV for Nodhead College is -$396,139.65.

2. NPV for Compulease

Annual Depreciation=320000/5

=$64000

Annual cash inflow=[(Lease payment-depreciation)*(1-tax rate)]+Depreciation

=$76000-$64000)*(1-.40)+$64000

=$71,200

NPV=Present value of cash ouflows-Present value of cash Inflows

=$71,200+$71,200/(1+.06)+$71,200/(1+.06)^2+$71,200/(1+.06)^3+$71,200*(1+.06)^4+$71,200*(1+.06)^5-$320,000

=$371,120.30-$320,000

=$51,120.30

3.There will be no gain from leasing for Nodhead College as it result in excess cash outflow of $76139.65(i.e.$320000-$396,139.65)