Finance

Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%.

a) What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-9?
b) What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?
c) What is the NPV of the lease relative to the purchase?
d) What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?

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