Question

Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%.

What is the NPV of the lease relative to the purchase?

-$1,039.78

$339.78

$360.22

$6,610.22

None of these

Answer 1

Solution :

The NPV of the lease relative to the purchase is = $ 339.78

Thus the solution is option 2 = $ 339.78

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 = 8 % ; Tax rate = 30 % = 0.30

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

= 8 % * ( 1 - 0.30 ) = 8 % * 0.70 = 5.6  %

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