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 value 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 relative to the after-tax cash flow from purchasing in year 0?
A) -$4,865
B) -$700
C) $6,950
D) $7,650
E) None of these.

Question

Quizplus · Accepted Answer

The Answer of 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 value 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 relative to the after-tax cash flow from purchasing in year 0?
A) -$4,865
B) -$700
C) $6,950
D) $7,650
E) None of these.

Your Firm Is Considering Leasing a New Computer