Quiz Company has a 12 year lease,with payments of $250,000 made at the beginning of each year.If no purchase option exists,and the company is in the 40% tax bracket,what is the annual after-tax cash outflow on the lease?

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Quizplus · Accepted Answer

Since the lease payments are made at the beginning of each year, the full amount of $250,000 is paid out annually. However, because the company is in the 40% tax bracket, the after-tax cost of these lease payments is reduced by the tax savings. The tax savings on the lease payment is 40% of $250,000, which is $100,000. Therefore, the after-tax cash outflow is the total payment minus the tax savings: $250,000 - $100,000 = $150,000.

Quiz Company Has a 12 Year Lease,with Payments of $250,000