Question
In: Finance
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 | ||||||||||
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