Question

Your firm is considering leasing a new computer. The lease lasts for 8 years. The lease calls for 8 payments of $8,000 per year with the first payment occurring immediately. The computer would cost $50,000 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 5%. The corporate tax rate is 34%. What is the NPV of the lease relative to the purchase?

		-$2,325
		$1,639
		-$1,742
		-$2,537
		-$1,492

Answer 1

Year	Cash flow-Lease	Tax saving	Net cash flow	PV factor @ 5%	PV
0	8,000		8,000	1.000	8,000
1	8,000	(2,720)	5,280	0.952	5,029
2	8,000	(2,720)	5,280	0.907	4,789
3	8,000	(2,720)	5,280	0.864	4,561
4	8,000	(2,720)	5,280	0.823	4,344
5	8,000	(2,720)	5,280	0.784	4,137
6	8,000	(2,720)	5,280	0.746	3,940
7	8,000	(2,720)	5,280	0.711	3,752
8		(2,720)	(2,720)	0.677	(1,841)
				NPV of Lease	36,711
	Lease cost	8000
	Tax saving @ 34%	2720
Year	Cash flow-Purchase	Tax saving on depreciation		PV factor @ 5%	PV
0	50,000		50,000	1.000	50,000
1		(2,125)	(2,125)	0.952	(2,024)
2		(2,125)	(2,125)	0.907	(1,927)
3		(2,125)	(2,125)	0.864	(1,836)
4		(2,125)	(2,125)	0.823	(1,748)
5		(2,125)	(2,125)	0.784	(1,665)
6		(2,125)	(2,125)	0.746	(1,586)
7		(2,125)	(2,125)	0.711	(1,510)
8		(2,125)	(2,125)	0.677	(1,438)
				NPV of Lease	36,266
	Annual deprecation	=50000/8	6250
	Tax saving @ 34%		2125
	NPV of lease	(36,711)
	NPV of purchase	(36,266)
	Variance	(445)