Fingm571 chapter 21 problem A3 - 19764

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Fingm571 chapter 21 problem A3

 

(Net advantage to leasing) A firm is considering leasing a computer system that costs $1,000,000 new. The lease requires annual payments of $135,000 in arrears for 10 years. The lessee pays income taxes at a 35% marginal rate. If it purchased the computer system, it could depreciate it to its expected residual value over 10 years. The lessee’s cost of similarly secured debt is 10% and its WACC is 15%.

  1. Calculate the net advantage to leasing assuming zero residual value. Should the firm lease the computer system?
  1. Calculate the net advantage to leasing assuming $250,000 residual value. Should the firm lease the computer syste

 

 

Solution Description

      (1 - T)(CFt - ΔEt) + TDt = (1 - 0.35)($135,000 - $0) + 0.35 x ($1,000,000 - $0) / 10

         (1 - T)(CFt -

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