Your firm is considering leasing a magic box. The lease lasts for three years. The lease calls for three payments of $1,350 per year with the first payment occurring at lease inception. The magic box would cost $3,600 to buy and would be straight-line depreciated to zero salvage value over three years. The firm can borrow at 6 percent, and the marginal corporate tax rate is 21 percent. What is the NPV of the lease?

Question

Quizplus · Accepted Answer

The NPV of the lease can be calculated by comparing the cost of leasing to the cost of buying. The lease payments are made at the beginning of each period, which means they are annuity due payments. The present value of these payments can be calculated using the formula for the present value of an annuity due. The cost of buying involves the purchase price minus the tax shield from depreciation. The difference between the present value of leasing and the cost of buying, adjusted for the tax effects, gives the NPV of the lease. Given the complexity of the calculation and the specific numbers provided, the correct answer is calculated to be −$146.51, indicating that leasing is less favorable than buying by that amount.

Your Firm Is Considering Leasing a Magic Box