A 319 Part 1: Cost of Owning 320 321 322 1. After-tax loan payments 323 2. Maintenance cost B C D E F G H Year 0 1 2 3 4 5 -$750 -$750 -$750 -$750 -$10,750 -$500 -$500 -$500 -$500 -$500 324 3. Maintenance tax savings $125 $125 $125 $125 $125 325 4. Depreciation tax savings 326 5. Residual value $500 $800 $480 $288 $288 $2,000 327 6. Tax on residual value 328 7. Net cash flow of owning 329 -$356 -$375 -$625 -$325 -$645 -$837 -$8,818 -$8,526 330 8. PV ownership CF @ 7.5% 331 Part 2: Cost of Leasing 332 333 9. Lease payment Year 0 1 2 3 4 5 -$2,600 -$2,600 -$2,600 -$2,600 -$2,600 334 10. Tax savings from lease $650 $650 $650 $650 $650 335 11. Net cash flow of leasing 336 -$1,950 -$1,950 -$1,950 -$1,950 -$1,950 $0 337 12. PV of leasing CF @ 7.5% -$8,481 338 Part 3: Net advantage to leasing (NAL) 339 13. NAL PV of leasing - PV of owning = $45 Source: Numbers in the figure are shown as rounded values for clarity in reporting. However, unrounded values are used for all calculations. See the Excel Tool Kit for this chapter. Notes: 1. The after-tax loan payments consist of after-tax interest for Years 1-4 and after-tax interest plus the principal amount in Year 5. 2. The net cash flows shown in Lines 7 and 11 are discounted at the lessee's after-tax cost of debt, 7.5%. 3. The MACRS depreciation allowances are 0.20, 0.32, 0.192, 0.1152, and 0.1152 in Years 1 through 5, respectively. Thus, the depreciation expense is 0.20 ($10,000) = $2,000 in Year 1, and so on. The depreciation tax savings in each year is 0.25(Depreciation). 4. The residual value is $2,000, while the book value is $576. Thus, Anderson would have to pay 0.25($2,000-$576) = $356 in taxes. These amounts are shown in Lines 5 and 6 in the cost-of-owning analysis. 5. Maintenance is shown at the beginning of the year to reflect cash that is set aside for routine maintenance throughout the year.