Question

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?

Answer 1

Cost	250,000
Purchase
Year	Depreciation	Depreciation	Tax benefit @ 35%	PV of these Benefits @ 8%	PV
1	20.00%	50,000	-	0.926	-
2	32.00%	80,000	-	0.857	-
3	19.20%	48,000	-	0.794	-
4	11.52%	28,800	-	0.735	-
5	11.52%	28,800	-	0.681	-
				NPV	-
Net Cost	250,000
Lease
Year	Lease	Tax benefit @ 35%	Net expense	PV of these Benefits @ 8%	PV
0	62,000	-	62,000	1.000	62,000
1	62,000	-	62,000	0.926	57,407
2	62,000	-	62,000	0.857	53,155
3	62,000	-	62,000	0.794	49,218
4	62,000	-	62,000	0.735	45,572
5	62,000	-	62,000	0.681	42,196
				NPV	309,548
Net Cost	309,548
Overall there will be loss from leasing	309548-250000
Lease loss	59,548