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Hudson Bay Corporation is considering leasing a new equipment. The lease lasts for 5 years. The...

Hudson Bay Corporation is considering leasing a new equipment. The lease lasts for 5 years. The lease calls for 5 payments of $42,000 per year with the first payment occurring immediately. The equipment would cost $195,000 to buy and would be straight-line depreciated to a zero salvage value over 5 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? $42,000 $195,000 $163,500 $72,600 $88,500

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Answer #1

After tax cash flow from leasing relative to after tax cash flow from purchasing=-Annual Lease payment*(1-tax rate)+Equipment Cost=-42000*(1-25%)+195000=163500

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