Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the NPV of the lease relative to the purchase?
A) -$125,000
B) -$36,970
C) $75,000
D) $125,000

Question

Quizplus · Accepted Answer

To calculate the NPV of leasing versus buying, we need to consider the cash flows associated with each option and discount them back to the present value at the firm's borrowing rate. For leasing, the payments are $25,000 per year for 4 years, with the first payment made immediately. For buying, the cost is $140,000, and the firm would depreciate this cost straight-line over 3 years, which also affects the tax shield. The lease payments are tax-deductible, so we need to account for the tax savings. The calculation involves discounting these cash flows at the firm's borrowing rate of 12%. The correct answer reflects the NPV calculation that incorporates these elements, showing that leasing is less costly than buying by $36,970 when considering the time value of money and tax implications.

Your Firm Is Considering Leasing a Radiographic X-Ray Machine