Question

2. Huston leases looms from Tangers. The cost of the looms is $30,000. The yearly beginning of year lease payments are $8,000 per year. The lease will last for three years. The company uses straight line depreciation over five years to depreciate the equipment. Tangers pays $750 a year in property taxes (end of year) due to Tangers owning the equipment. The estimated salvage value is $4,000. The corporate tax rate for both firms is 40%. The cost of borrowing is 10% and the required rate of return is 15%

Find the NAL of the Lease.

Should Huston lease the equipment? Why?

Answer 1

Based on the given data, pls find below workings,steps and answers:

Net Advantage to Leasing is $ 9822.31 ; Huston should lease the equiment rathan than buying the same as the net advantage by leasing over buying is postive (Savings of net cashflows).

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;