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 would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?
A) -$605
B) -$955
C) -$1,455
D) -$1,305
E) None of these.

Question

Quizplus · Accepted Answer

To calculate the after-tax cash flow in year 9, we need to determine the tax on the gain or loss from the sale of the asset.
The book value of the computer at the end of year 9 would be $7,650 - ($7,650 / 9) * 9 = $0.
If the computer is sold for $500, the gain would be $500, which results in a taxable gain of $500 - $0 = $500.
The tax on the gain is 30% * $500 = $150.
The cash inflow from the sale of the computer would be $500, so the after-tax cash flow in year 9 would be -$1,000 + $500 - $150 = -$1,305.
Therefore, the best choice is D.

Your Firm Is Considering Leasing a New Computer