Question

Airmax is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $11,300 per year with the first payment occurring immediately. The equipment would cost $44,000 to buy and would be straight-line depreciated to a zero salvage value over 5 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6%. The corporate tax rate is 25%. What is the NPV of the lease relative to the purchase?

		-$3,218.66
		-$4,537.23
		$737.11
		$2,912.64
		$1,097.26

Answer 1

Solution :

The NPV of the lease relative to the purchase is = - $ 4,537.23

Thus the solution is Option 2

The discount rate used in the solution is the after tax discount rate.

As per the information given in the question we have

Discount rate = 6 %

Tax rate = 25 % = 0.25

Thus, after tax discount rate = Discount rate * ( 1 - Tax rate )

= 6 % * ( 1- 0.25 ) = 6 % * 0.75 = 4.5 %

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution.