Question
A tree cutting business needs a new stump grinder. The machine can be purchased outright for $10,000, or it can be acquired via a 5-year
A tree cutting business needs a new stump grinder. The machine can be purchased outright for $10,000, or it can be acquired via a 5-year financing lease. The lease payments are $1,000 per year, paid in advance, with a final residual payment of $2,000 at the end of the 5th year, after which the business will own the grinder. The machine can be depreciated straight-line over 5 years and the business pays tax at 30%.Answer the following questions, given that the company's cost of borrowing is 5% p.a.
What is the incremental cash flow in Year 0?
What are the incremental cash flows in Years 1-4?
What is the incremental cash flow in Year 5?
What is the NPV of the incremental cash flows?
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