Question

Your firm is considering leasing a radiographic x-ray machine. the lease lasts for 3 years. the lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. the computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. the actual salvage value is negligible. the firm can borrow at a rate of 12%. the corporate tax rate is 40%.what is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?

a.-$15,000
b.-$100,000
c.-$125,000
d.$15,000

Answer 1

The after-tax cash flow from leasing relative to purchasing in year 0 is -$15,000.

Step-by-step explanation:

To determine the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing, we need to calculate the net present value (NPV) of each option.

For leasing, the cash flows are the annual lease payments of $25,000 for 3 years. With a tax rate of 40%, the after-tax cash flows from leasing can be calculated as:

After-tax cash flow from leasing = (Lease payment - Tax savings)

The tax savings can be calculated as (Lease payment * Tax rate). Plugging in the values, we have:

After-tax cash flow from leasing = (25,000 - (25,000 * 0.40)) * 3

Simplifying this equation gives us:

After-tax cash flow from leasing = -15,000

Therefore, the after-tax cash flow from leasing relative to purchasing in year 0 is -15,000.