equipment. MACRS 5-year Depreciation Schedule Year 1 2 3 4 5 6 Depr. Rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Depr. Exp. $50,000 580,000 $48,000 528,800 528,800 $14,400 We can now construct our table of incremental cash flows from these two alternatives. Remember, that the appropriate discount rate in this scenario is the after tax cost of borrowing, or: 10%*(1-40%) = 6%. NPV LEASE ANALYSIS OF INCREMENTAL CASH FLOWS Year = 0 1 2 3 4 Cost of ownership Purchase cost $250,000 Loan proceeds $250,000 After-tax interest payment (515,000) ($11,763) ($8,213) (54,302) Principal payment (553,868) ($59,254) ($65,180) ($71,698) Maintenance cost (520,000) ($20,000) (520,000) ($20,000) Tax savings from maintenance cost $8,000 58,000 58,000 $8,000 Tax savings from depreciation $20,000 532,000 $19,200 511,520 Salvage value $42,500 Net cash flow from ownership 50 (560,863) ($51,022) (566,193) ($33,980) PV cost of ownership (5185,324) Show the formula Cost of leasing Lease payment (570,000) (570,000) ($70,000) (570,000) ($70,000) Tax savings from lease payment $28,000 $28,000 528,000 $28,000 528,000 Net cash flow from leasing (542,000) (542,000) ($42,000) ($42,000) ($42,000) PV cost of leasing ($187,534) Show the formula Cost Comparison PV ownership cost @ 6% ($185,324) PV of leasing @ 6% ($187,534) Net Advantage to Leasing (52,211)