Present value of a lease
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You are considering a five-year lease of office space for R&D personnel. Once signed, the lease cannot be canceled. It would commit your firm to six annual $100,000 payments, with the first payment due immediately. What is the present value of the lease if your company's borrowing rate is 9% and its tax rate is 35%? (note: the lease payments would be tax-deductible)
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Solution Summary
This solution shows how to calculate the present value of a lease, given a company's borrowing rate and tax rate and the value of the required annual payments.
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The after-tax cash flows are: (1 - 0.35) x $100,000
0.65 x $100,000 = $65,000 per year.
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