1. Your firm is considering leasing a new radiographic device. The lease lasts three years. The lease calls for four payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight line depreciated to a zero salvage value over three years. The actual salvage is negligible because of technological obsolesce. The firm can borrow at a rate of %12. The corporate tax rate is %40.

A. What is the NPV of the lease relative to the purchase?

Step 1

After-tax flow from purchase in year 0= $140,000

Step 2

After-tax flow from leasing in year 0= $25,000*.40= $10,000

$25,000-$10,000= $15,000

Step 3

Net after-tax flow from leasing relative to purchasing in year 0

= $140,000-15,000

=$125,000

B. What would the after-tax cash flow in year three be if the asset had a residual value of $1,000 (ignoring any possible risk differences)?