Carnival Company is considering leasing a new equipment. The lease lasts for 8 y

Question

Carnival Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $9,000 per year with the first payment occurring immediately. The equipment would cost $60,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6%. The corporate tax rate is 25%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?

Explanation / Answer

What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?

First lease Payment after tax =9000*(1-.25)=6750

Cost of Machine if Purchased =60000

fter-tax cash flow from purchasing in year 0=60000-6750=$53250

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects