Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the after-tax cash flow in years 1 through 5?
A) $126,600
B) $198,000
C) $269,400
D) $287,250

Question

Quizplus · Accepted Answer

The after-tax cash flow is calculated by considering the tax shield from depreciation and the tax effect on lease payments. Depreciation per year is $1,050,000 / 5 = $210,000. The tax shield from depreciation is $210,000 * 34% = $71,400. The after-tax lease payment is $300,000 * (1 - 34%) = $198,000. The after-tax cash flow is $198,000 - $71,400 = $126,600. However, the correct calculation should consider the tax shield from depreciation as an addition to the cash flow, leading to $198,000 + $71,400 = $269,400.

Your Firm Is Considering Leasing a New Robotic Milling Control