Suppose that a lease increases after-tax cash flows by $200,000 in each of years 1 through 10 compared with taking out an equivalent loan to purchase the asset. All else equal, and given a usable life of 10 years with no salvage value, what is the advantage of the lease, given a discount rate of 7 percent (round to the nearest $100,000)?

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The advantage of the lease is the present value of the after-tax cash flows, which is the sum of the present values of each year's cash flow. Using a discount rate of 7% and a 10-year life with no salvage value, the present value of the cash flows is $1,401,870. Therefore, the advantage of the lease is $1,401,870, rounded to the nearest $100,000, which is $1,400,000.

Suppose That a Lease Increases After-Tax Cash Flows by $200,000