Artisan's is considering leasing a new computer.The lease terms include five annual payments of $1,650 with the first payment occurring at the lease signing.The computer would cost $8,500 to buy and would be depreciated straightline to a zero salvage value over 5 years.The firm can borrow at a rate of 7.5 percent and has a tax rate of 21 percent.What is the cash flow from leasing relative to purchasing in Year 0?

Question

Quizplus · Accepted Answer

Cash flow from leasing in Year 0: 
- First lease payment: -$1,650.00 
- Tax savings from lease payment: +$346.50 (21% of $1,650) 
- Net cash flow from leasing: -$1,303.50

Cash flow from purchasing in Year 0: 
- Initial cost: -$8,500.00 
- Tax savings from depreciation: +$1,785.00 (Year 0 depreciation expense of $1,700 multiplied by tax rate of 21%) 
- Net cash flow from purchasing: -$6,715.00

Comparing the two cash flows, the net cash flow from leasing is better than purchasing, so leasing is the best choice.

Artisan's Is Considering Leasing a New Computer