Your firm is considering leasing a new radiographic device. The lease lasts for

Question

Your firm is considering leasing a new radiographic device. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 12%. The corporate tax rate is 40%.

What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?

Explanation / Answer

CASH FLOW STATEMENT AFTER TAX IN THE FIRST YEAR Particulars Amounts calculations PAYMENT TOWARDS LEASE 50000 Computer Purchase 140000 Outflow 190000 Less Tax Benefit on lease 13333.33333 100000/3*40% Less Tax Benefit on computer 18666.66667 140000/3*40% Inflow 32000 Net Out Flow 158000 Answer : the answer is doesnot match with any of the option so my answer is none of these Note & Assumption: In the given Queston there is no Indication that the company is using the borrowing facality

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