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 relative to the after-tax cash flow from purchasing in years 1-9?

Question

Quizplus · Accepted Answer

The after-tax cash flow from leasing is calculated by considering the lease payments and the tax shield from depreciation. The lease payment is £1,000, and the tax shield from depreciation is £255 (30% of £850, which is the annual depreciation of £7,650 over 9 years). Therefore, the after-tax cash flow from leasing is £1,000 - £255 = £745. The after-tax cash flow from purchasing is the depreciation tax shield of £255. The difference is £745 - £255 = £490. Since this is a cost, it is negative, so the answer is £-955.

Your Firm Is Considering Leasing a New Computer