Your firm is considering leasing a new laser light. The lease lasts for 3 years. The lease calls for 4 payments of $10,000 per year with the first payment occurring immediately. The computer would cost $45,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 10%. The corporate tax rate is 35%.
-What is the NPV of the lease relative to the purchase?
A)$-6,500
B)$7,380
C)$4,678
D)$12,400
E)None of the above

Question

Quizplus · Accepted Answer

The NPV of the lease relative to the purchase is calculated by comparing the after-tax cost of leasing with the after-tax cost of owning. The lease payments are $10,000 each, with the first payment occurring immediately, so the present value of lease payments is calculated using the borrowing rate of 10%. The cost of purchasing is $45,000, with tax savings from depreciation. After calculating both scenarios, the NPV of the lease relative to the purchase is $7,380.

Your Firm Is Considering Leasing a New Laser Light