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Your Firm is Considering Leasing a New Computer

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14) 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 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 after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-9?

15) Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The black box would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%.
What is the maximum lease payment that you would be willing to make?

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Solution Summary

This solution contains step-by-step calculations to determine the net present value of the leasing situation and the net present value of the robotic mailing system.

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14)
First of all,
Cash Flow After Tax = Net Income + Depreciation + Amortization + Other non-cash charges
We cannot calculate the Cash Flow After Tax since we are not able to calculate the company's Net Income. However, we can trace the impacts of the transaction in both cases on Net Income, then translate that to Cash Flow After Tax

Please see the attached Excel sheet for the overall impacts on both Net Income and After Tax Cash Flow

Under the leasing situation, the lease expenses only impact the Net ...

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