Craxton Engineering will either purchase or lease a new $747,000 fabricator. If?
ID: 2657995 • Letter: C
Question
Craxton Engineering will either purchase or lease a new
$747,000
fabricator. If? purchased, the fabricator will be depreciated on a? straight-line basis over seven years. Craxton can lease the fabricator for
$132,000
per year for seven years.? Craxton's tax rate is
35%.
?(Assume the fabricator has no residual value at the end of the seven?years.)
a. What are the free cash flow consequences of buying the fabricator if the lease is a true tax? lease?
b. What are the free cash flow consequences of leasing the fabricator if the lease is a true tax? lease?
c. What are the incremental free cash flows of leasing versus? buying?
Explanation / Answer
Craxton Engineering Cost of New Fabricator $ 7,47,000.00 Useful life 7 Years Lease per Year $ 1,32,000.00 Tax Rate 35% Straight line Depreciation=($747000/7) $ 1,06,714.29 a) Free Cash Flow in Year 0 $ 7,47,000.00 Free Cash Flow in Year (1-7)=($106714.29*35%) $ 37,350.00 b) Free Cash Flow in Year(0-6)=After tax lease payment=($132000*(1-.35)) $ 85,800.00 c) Inremental free cash flow leasing Vs Buying (A) (B) (A)-(B) Leasing Buying Difference Free Cash Flow in Year 0 $ -85,800.00 $ -7,47,000.00 $ 6,61,200.00 Free Cash Flow in Year (1-6) $ -85,800.00 $ -37,350.00 $ 1,22,300.00 Free Cash Flow in Year 7 $ - $ -37,350.00 $ 37,350.00