Artisan’s is considering leasing a new computer. The lease terms include five an

Question

Artisan’s is considering leasing a new computer. The lease terms include five annual payments of $1,500 with the first payment occurring when the lease is signed. The computer would cost $7,200 to buy and would be depreciated straight-line 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 8 percent and has a tax rate of 35 percent. What is the cash flow from leasing relative to purchasing in Year 3?

-$1,325

-$1,479

-$1,295

-$1,380

-$975

Explanation / Answer

If leased cash flow= lease payments*(1-tax rate) = 1500*0.65=975 net outflow

if purchased cash flow is the savings in tax payment by claiming depreciation

Depreciation= 7200/5= 1440

Tax savings= 1440*0.35= 504

Cash flow from leasing relative to purchaseing= cash flow from leasing- cash flow from purchasing= -975-504= -1479

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