Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What is the after-tax cash flow from leasing in years 1-9?
A) $255
B) $955
C) $1,295
D) $1,850

Question

Quizplus · Accepted Answer

The after-tax cash flow from leasing is calculated by taking the lease payment and subtracting the tax shield from the lease payment. The tax shield is the lease payment multiplied by the tax rate. Therefore, the after-tax cash flow is $1,000 - ($1,000 * 0.30) = $1,000 - $300 = $700. However, since the first payment occurs immediately, the after-tax cash flow for years 1-9 is $1,000 - $300 = $700, and the first payment is $1,000. Therefore, the after-tax cash flow from leasing in years 1-9 is $1,000 - $300 = $700.

Your Firm Is Considering Leasing a New Computer