What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3?
A) $15,000
B) $33,667
C) $2,750
D) $1,500

Question

Quizplus · Accepted Answer

To calculate the after-tax cash flow from leasing: 
- Calculate the annual lease payment: $10,000 x 0.08 = $800
- Subtract the lease payment from the pre-tax cash flow: $30,000 - $800 = $29,200
- Apply the tax rate to the pre-tax lease cash flow: $29,200 x 0.3 = $8,760
- Add back any depreciation tax shield: $2,000 x 0.3 = $600
- Add back any tax savings from the lease payment: $800 x 0.3 = $240
- Total after-tax cash flow from leasing: $8,760 + $600 + $240 = $9,600

To calculate the after-tax cash flow from purchasing: 
- Calculate the depreciation expense: $20,000 / 3 = $6,667
- Calculate the interest expense: $20,000 x 0.1 = $2,000
- Add back any tax savings from interest expense: $2,000 x 0.3 = $600
- Calculate the pre-tax cash flow: $30,000 - $6,667 - $2,000 = $21,333
- Apply the tax rate to the pre-tax purchasing cash flow: $21,333 x 0.3 = $6,400
- Add back any tax shield from depreciation: $6,667 x 0.3 = $2,000
- Total after-tax cash flow from purchasing: $6,400 + $2,000 + $600 = $9,000

The difference in after-tax cash flow between leasing and purchasing in years 1-3 is: $9,600 - $9,000 = $600.

Therefore, the best choice is to LEASE since it provides a higher after-tax cash flow of $600 in years 1-3.

What Is the After-Tax Cash Flow from Leasing Relative to the After-Tax