I need assistance with this problem, I do not know what I am doing wrong. I can not match the book answer.
Assume the tax rate is 40% and the equipment's depreciation would be $100 per year. If the company leased the asset on a 2-year lease, the payment would be $110 at the beginning of each year. If Boston's borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should Boston's lease or buy the equipment.
Cost of Owning = -$127
Cost of Leasing= -$128
Cost of Leasing
Year 0 Year 1 Year 2
Lease Payment 0 (110) (110)
Payment Tax Savings 44 44 (110 x 40%)
Net Cash Flow (66) (66)
66/(1.06)^1 +66/(1.06)^2 = 121
PV Cost of leasing @ 6% = (121)
In your leasing answer, you have taken the lease payments as end of the year. The lease payments are at beginning of the year. The first lease payment would not be ...
The solution explains how to decide between lease and buy decision