Your company must obtain some laser measurement devices for the next six years a
ID: 2766923 • Letter: Y
Question
Your company must obtain some laser measurement devices for the next six years and is considering leasing. You have been directed to perform an actual-dollar after-tax study of the leasing approach. The pertinent information for the study is as follows: Lease costs: First year, $80,000; second year: $60,000; third through sixth years, $50,000 per year. Assume that a six-year contract has been offered by the lessor that fixes these costs over the six-year period. Other costs (not covered under contract): $4,000 in year-0 dollars, and estimated to increase 10% (in terms of actual dollar amount) each year. Effective income tax rate: 40%. If the real MARR (ir) after taxes is 4.5% per year and the annual inflation rate (f) is 7.194% per year, what is the actual-dollar after-tax equivalent annual cost for the leasing alternative?
Explanation / Answer
Real MARR = (Market MARR-Inflation rate)/(1+inflation rate)
0.045 = (market MARR-0.07194)/(1+0.07194)
0.045+0.0032373 =market MARR – 0.07194
Market MARR = 0.045+0.0032373+0.07194
Market MARR = 12.02%
Year
lease cost
Other cost
Total cost
After tax cost
(1-0.40)*total cost
Dis factor @12.02%
Discounted cashflow
0
4000
4,000.00
2,400.00
1
2,400.00
1
80000
4400
84,400.00
50,640.00
0.893
45,206.21
2
60000
4840
64,840.00
38,904.00
0.797
31,002.96
3
50000
5324
55,324.00
33,194.40
0.711
23,614.47
4
50000
5856.4
55,856.40
33,513.84
0.635
21,283.44
5
50000
6442.04
56,442.04
33,865.22
0.567
19,198.89
6
50000
7086.244
57,086.24
34,251.75
0.506
17,334.42
4.109
1,60,040.39
Equivalent annual cost (160040/4.109)
38,947.99
Year
lease cost
Other cost
Total cost
After tax cost
(1-0.40)*total cost
Dis factor @12.02%
Discounted cashflow
0
4000
4,000.00
2,400.00
1
2,400.00
1
80000
4400
84,400.00
50,640.00
0.893
45,206.21
2
60000
4840
64,840.00
38,904.00
0.797
31,002.96
3
50000
5324
55,324.00
33,194.40
0.711
23,614.47
4
50000
5856.4
55,856.40
33,513.84
0.635
21,283.44
5
50000
6442.04
56,442.04
33,865.22
0.567
19,198.89
6
50000
7086.244
57,086.24
34,251.75
0.506
17,334.42
4.109
1,60,040.39
Equivalent annual cost (160040/4.109)
38,947.99
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