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Edith Aviation is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: Year 1 Lease = -64,329 Purchase= -68,454 Year 2 Lease= -64,329 Purchase= -59,110 Year 3 Lease= -64,329 Purchase= -63,596 Year 4 Lease= -64,329 Purchase= 66,633 Year 5 Lease= 64,329 Purchase= 30,056 (a) Given the above cash outflows for each alternative, calculate the present value of the after-tax cash flows using the after-tax cost of debt for each alternative. (b) Which alternative do you recommend? Why?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91796601

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