A new robotic welder can be leased for 3 years with annual payments of $225,000 with the first payment occurring at lease inception.The system would cost $850,000 to buy and would be depreciated straightline to a zero salvage value over five years.The actual salvage value is expected to be $65,000 at the end of the five years.The firm can borrow at 8 percent and has a tax rate of 21 percent.What is the Year 0 incremental cash flow from leasing instead of buying?

Question

Quizplus · Accepted Answer

Year 0 incremental cash flow from leasing instead of buying can be calculated as follows:
Lease payment in year 0 = $225,000
Tax savings from lease payment = 0.21 x $225,000 = $47,250
Cash flow from lease = -$225,000 + $47,250 = -$177,750
Year 0 incremental cash flow from buying = -$850,000
Therefore, Year 0 incremental cash flow from leasing instead of buying = -$177,750 - (-$850,000) = $672,250.
Hence, the best choice is C.

A New Robotic Welder Can Be Leased for 3 Years