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 NPV of the lease?
A) $1039.78
B) $6,610.22
C) -$339.78
D) -$360.22

Question

Quizplus · Accepted Answer

The NPV of the lease is calculated by comparing the cost of leasing with the cost of buying. The cost of buying includes the purchase price minus the present value of tax shields from depreciation. The cost of leasing includes the present value of lease payments. The NPV is negative, indicating leasing is more expensive than buying.

Your Firm Is Considering Leasing a New Computer