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ASB is considering leasing a new machine. The lease calls for 9 payments of $1,403 per year with the first payment occurring immediately. The machine costs $8,683 to buy. The present value of CCA tax shield is $998. The present value of its salvage value is $496 and the present value of CCA recapture is $61. ASB firm can borrow at a rate of 10%. The corporate tax rate is 30%. What is the NPV of leasing?

User Engineero
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2 Answers

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Final answer:

Calculating the NPV of leasing versus buying involves comparing the present value of lease payments, tax shields, salvage value, and CCA recapture against the cost of buying the machine. However, complete information is required to perform the correct calculation, including the lease term and the exact lease payment schedule.

Step-by-step explanation:

The question is attempting to analyze the financial decision of leasing a machine versus buying it by calculating the Net Present Value (NPV) of the lease option. To find the NPV of leasing for ASB firm, we would need to take into account the cost of leasing, which includes the immediate lease payment and the subsequent 8 annual payments, and compare it to the cost of buying. However, the provided data is incomplete to perform a full NPV calculation as it doesn't specify the lease term or the exact timing and value of lease payments beyond the first year.

Assuming the lease payments are an annuity due (since the first payment is immediate), the annual payment's present value can be estimated using the present value of an annuity due formula, which adjusts the standard annuity present value for the extra period of time. The tax shields, salvage value, and CCA recapture have already been provided in present value terms.

To calculate the NPV of leasing, we would sum the present values of the lease payments (less any tax shields), the salvage value, and subtract any recapture and the cost of purchasing the machine. Lastly, we would compare this NPV of leasing against the NPV of buying (which might include the tax benefits of depreciation, for example) to make an informed decision.

User Samrat Patil
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6 votes

Final answer:

The NPV (Net Present Value) of leasing can be calculated by determining the present value of the lease payments and comparing it to the cost of buying the machine outright. The NPV in this case is $601.

Step-by-step explanation:

The NPV (Net Present Value) of leasing can be calculated by determining the present value of the lease payments and comparing it to the cost of buying the machine outright. The formula for NPV is NPV = Cost of Buying - Present Value of Lease Payments. To calculate the present value of the lease payments, you need to discount each payment back to the present using the appropriate interest rate. In this case, the interest rate is 10%.

The present value of the lease payments can be calculated as follows:

Year 1: $1,403 / (1 + 0.10)1 = $1,275
Year 2: $1,403 / (1 + 0.10)2 = $1,159
Year 3: $1,403 / (1 + 0.10)3 = $1,053
Year 4: $1,403 / (1 + 0.10)4 = $957
Year 5: $1,403 / (1 + 0.10)5 = $870
Year 6: $1,403 / (1 + 0.10)6 = $792
Year 7: $1,403 / (1 + 0.10)7 = $721
Year 8: $1,403 / (1 + 0.10)8 = $657
Year 9: $1,403 / (1 + 0.10)9 = $598

Sum of Present Values = $1,275 + $1,159 + $1,053 + $957 + $870 + $792 + $721 + $657 + $598 = $8,082

The NPV of leasing is calculated as follows:

NPV = Cost of Buying - Present Value of Lease Payments
NPV = $8,683 - $8,082 = $601

User Mohamad Al Asmar
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