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Nodhead College needs a new computer. It can either buy it for $250,000 or lease it...

Nodhead College needs a new computer. It can either buy it for $250,000 or lease it from Compulease. The lease terms require Nodhead to make six annual payments (prepaid) of $62,000. Nodhead pays no tax. Compulease pays tax at 35%. Compulease can depreciate the computer for tax purposes using 5-year MACRS. The computer will have no residual value at the end of year 5. The interest rate is 8%.

a. What is the NPV of the lease for Nodhead College?

b. What is the NPV for Compulease?

c. What is the overall gain from leasing?

Solutions

Expert Solution

Particuars 0 1 2 3 4 5 6
Cost of new machine 250000
Lost Depr Tax Shield -17500 -28000 -16800 -10080 -10080 -5040
Lease Payment -62000 -62000 -62000 -62000 -62000 -62000
Taxshield Lease 21700 21700 21700 21700 21700 21700
CF of Lease 209700 -57800 -68300 -57100 -50380 -50380 -5040
NPV of Lease(A), r=8% -57407.4 -53155.0069 -49217.6 -45571.9 -42196.2 0 Total= -247548.02
r 8% 5.20%
T 35%
NPV of Lease to Lessor(B) r=5.2% -54943 -61714.7855 -49044.3 -41133.5 -39100.2 -3718.23 Total= -249654.02
-57407.4
A) NPV of the Lease for Nothead College = 250000- Total of A -62000
250000-247548.02-62000 -59548.0223
B) NPV of Lease to Lessor 209700-Total of B
209700 -249654.02 -39954.0194
C) Overall gain from Leasing -19594

jeff jeffy answered 1 year ago
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