Artisan's is considering leasing a new computer.The lease terms include five annual payments of $1,500 with the first payment occurring when the lease is signed.The computer would cost $7,200 to buy and would be depreciated straightline to a zero salvage value over 5 years.The actual salvage value is negligible because of technological obsolescence.The firm can borrow at a rate of 8 percent and has a tax rate of 21 percent.What is the cash flow from leasing relative to purchasing in Year 3?

Question

Quizplus · Accepted Answer

To calculate the cash flow from leasing relative to purchasing in Year 3, we need to consider the cost of leasing versus the cost of owning and depreciating the computer, including the tax shield from depreciation and interest (if applicable).1. **Lease Payments**: The annual lease payment is $1,500. Since lease payments are tax-deductible, the after-tax cost of the lease payment in Year 3 is $1,500 * (1 - 0.21) = $1,185.2. **Depreciation**: The computer would be depreciated straight-line over 5 years, so the annual depreciation expense is $7,200 / 5 = $1,440. The tax shield from depreciation is $1,440 * 0.21 = $302.40.3. **Cost of Owning**: The cost of owning and using the computer in Year 3 is essentially the opportunity cost of the capital used to purchase the computer (if borrowed at 8%) and the tax shield from depreciation. However, since the problem does not specify borrowing to purchase the computer, we focus on the depreciation tax shield.4. **Cash Flow from Leasing Relative to Purchasing**: The cash flow from leasing relative to purchasing is the after-tax lease payment minus the tax shield from depreciation. Therefore, it is $1,185 - $302.40 = $882.60.However, none of the provided options match the calculated value. Given the options, it seems there might have been a misunderstanding in the calculation process or an error in the interpretation of the question. The correct approach involves comparing the after-tax lease payments to the after-tax cost of owning, which includes depreciation and any cost of capital if specified. Since the calculation provided does not match any options and there might be additional considerations not accounted for in the brief explanation, such as the upfront payment's effect amortized over the lease term or a more detailed analysis of the cost of capital, the correct answer based on standard financial analysis principles would involve these considerations. However, without further details or a recalibration of the calculation that aligns with the options, the precise answer cannot be determined from the provided calculation steps.

Artisan's Is Considering Leasing a New Computer