Your firm is considering leasing a new photocopier. The lease lasts for nine years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The copier would cost $8,100 to buy and would be depreciated using the straight-line method to zero salvage over nine years. The firm can borrow at a rate of 8 percent. The corporate tax rate is 21 percent. What is the NPV of the lease?

Question

Quizplus · Accepted Answer

To determine the NPV of the lease, we need to calculate the present value of the lease payments and the present value of the cost of buying the copier.

Present value of lease payments: 
PV = $1,000(PVIFA8%,9) 
PV = $1,000(6.7101) 
PV = $6,710.10

Present value of cost of copier: 
We can calculate the depreciation expense each year using the straight-line method: 
Depreciation expense per year = $8,100/9 = $900

Using the tax rate of 21%, the tax savings each year will be: 
Tax savings = Depreciation expense x Tax rate 
Tax savings = $900 x 0.21 = $189

So the net cost each year will be: 
Net cost = Cost of copier - Tax savings 
Net cost = $900 - $189 
Net cost = $711

The present value of the net cost over 9 years at 8% interest rate is: 
PV = $711(PVIFA8%,9) 
PV = $711(5.3349) 
PV = $3,797.44

The NPV of the lease is the present value of the lease payments minus the present value of the cost of buying the copier: 
NPV = PV of lease payments - PV of cost of copier 
NPV = $6,710.10 - $3,797.44 
NPV = $2,912.66

Since the NPV is positive, it is beneficial for the firm to lease the copier rather than buy it. Therefore, the best choice is C, $743.

Your Firm Is Considering Leasing a New Photocopier