Question

Healthsouth Company is considering leasing a new equipment. The lease lasts for 8 years. The lease calls for 8 payments of $111,000 per year with the first payment occurring immediately. The equipment would cost $724,000 to buy and would be straight-line depreciated to a zero salvage value over 8 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 6.5%. 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? $535,250 -$111,000 -$542,000 $618,000 $640,750

Answer 1

Solution :

The after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0 = $ 640,750

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

04.11.2019 - Microsoft Excel XES FILE HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW A B Statement showing calculation of After tax cash flow of the lease option in Year 0 Sl.No. Particulars Amount Tax@25% After Tax Lease (1) (2) = (1) * 0.25 payment (3) = (1) - (2) 1 Lease payment Year 0 $ -111,000.00 $ -27,750.00 $ -83,250.00 After tax cash flow of the lease option in Year 0 $ -83,250.00 Sl.No. Particulars Statement showing calculation of After tax cash flow of the purchase option in Year 0 Amount Depreciation Tax shield @ 25% (1) (3)=(2)*0.25 Total of cash Flows (4) = (1) + (3) - $ - 1 Cash Outflow - Initial Investment - Year 0 $ -724,000.00 $ After tax cash flow of the Purchase option in Year 0 $ $ -724,000.00 -724,000.00 Statement showing after-tax cash flow from leasing relative to the after-tax cash flow Sl.No. Particulars Amount 1 After tax cash flow of the lease option in Year 0 $ -83,250.00 2 Less : After tax cash flow of the purchase option in Year 0 $ -724,000.00 3 After-tax cash flow from leasing relative to the after-tax $ 640,750.00 cash flow from purchasing in year 0 = (1) - (2)