Question

NO i Data Table gem e. TI thine costing $90. purchase plans by the lessor, ins Ignore any future quip chase ed up cove Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year Recovery 3 years 5 years 7 years 10 years 33% 20% 14% 10% 45% 32% 25% 18% 15% 19% 18% 14% 7% 12% 12% 12% 12% H-of-year payments htages. The firm w þ keep the equipme year ax cas e of e tflow owOn AWN 9% = Totals 100% 100% 100% 100% These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance depreciation using the half-year convention the ans Print Done

Answer 1

Part a)

Lease

The after-tax cash outflows associated with the lease in years 1 through 4 is calculated as below:

After-Tax Cash Outflows Associated with Lease in Years 1 through 4 = Year End Payments*(1-Tax Rate) = 25,600*(1-29%) = $18,176

After-Tax Cash Outflows Associated with Lease in Year 5 = 18,176 + Purchase Value at Termination of Lease = 18,176 + 26,000 = $44,176

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Purchase

The after-tax cash outflows associated with the purchase option in years 1 through 5 is calculated as follows:

Year	Loan Payment (A)	Maintenance (B)	Depreciation (C)	Interest (D)	Total Deductions (E=B+C+D)	Tax Shield (E*Tax Rate) [F]	After-Tax Cash Flows (A+B-F)
1	28,131	3,000	18,000	15,300	36,300	10,527	20,604
2	28,131	3,000	28,800	13,119	44,919	13,026	18,105
3	28,131	3,000	17,100	10,567	30,667	8,893	22,238
4	28,131	3,000	10,800	7,581	21,381	6,200	24,931
5	28,131	3,000	10,800	4,087	17,887	5,187	25,944

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Part b)

Lease

The present value of cash outflows under lease is determined as below:

Present Value of Cash Outflows under Lease = Cash Outflow Year 1/(1+After-Tax Cost of Debt)^1 + Cash Outflow Year 2/(1+After-Tax Cost of Debt)^2 + Cash Outflow Year 3/(1+After-Tax Cost of Debt)^3 + Cash Outflow Year 4/(1+After-Tax Cost of Debt)^4 + Cash Outflow Year 5/(1+After-Tax Cost of Debt)^5

Substituting values in the above formula, we get,

Present Value of Cash Outflows under Lease = 18,176/(1+11%)^1 + 18,176/(1+11%)^2 + 18,176/(1+11%)^3 + 18,176/(1+11%)^4 + 44,176/(1+11%)^5 = $82,606.36 or $82,606

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Purchase

The present value of cash outflows under purchase is arrived as follows:

Present Value of Cash Outflows under Purchase = Cash Outflow Year 1/(1+After-Tax Cost of Debt)^1 + Cash Outflow Year 2/(1+After-Tax Cost of Debt)^2 + Cash Outflow Year 3/(1+After-Tax Cost of Debt)^3 + Cash Outflow Year 4/(1+After-Tax Cost of Debt)^4 + Cash Outflow Year 5/(1+After-Tax Cost of Debt)^5

Substituting values in the above formula, we get,

Present Value of Cash Outflows under Purchase = 20,604/(1+11%)^1 + 18,105/(1+11%)^2 + 22,238/(1+11%)^3 + 24,931/(1+11%)^4 + 25,944/(1+11%)^5 = $81,336.14 or $81,336

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Notes:

There can be a slight difference in final answer on account of rounding off values.