N and M Corp. is considering leasing a new machine for $25 000 per year. The lease arrangement calls

QUESTION

N and M Corp. is considering leasing a new machine for $25,000 per year. The lease arrangement calls for a 5-year lease with an option to purchase the machine at the end of the lease for $3,500. The firm is in the 34% tax bracket. What is the present value of the lease outflows, including the purchase option, if lease payments are made at the end of each year and if the after-tax cost of debt is 7%?
Given Yearly lease payment $ 25,000 Purchase price after lease period $ 3,500 Post-tax cost of debt 7% Tax rate 34% Year 0 1 2 3 4 5 Yearly lease payment $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 Purchase price after lease period $

500 Total cash flows $25,000 $25,000 $25,000 $25,000 $28,500 Discounted cash flows $ 23,364 $ 21,836 $ 20,407 $ 19,072 $ 20,320 PV of lease outflows $1,05,000

ANSWER:

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