Question
Firm A is a transportation company. It needs new cars. It has two opportunities: either lease or buy. The lease contract is 2 years. The
Firm A is a transportation company. It needs new cars. It has two opportunities: either lease or buy.
The lease contract is 2 years. The before-tax lease payment is 13,000 per year (claimed at the end of the year) for one car. If firm A leases the cars, it will incur a before-tax operating cost per car of 1000 in year 1 and 1200 in year 2 (claimed at the end of the year)
The cost of one car is 25,000. If firm A buys the cars, it will incur a before-tax operating cost per car of 1500 in year 1 and 1700 in year 2 (claimed at the end of the year). The salvage value of one car after 2 years is 10,000. The depreciation amount of one car is 5000 in year 1 and 8000 in year 2 (claimed at the end of the year)
The risk-free rate is 5%. The corporate tax rate is 25%
PLEASE SOLVE MANUALLY AND SHOW WORK (not on excel)
1) Show the after-tax cash-flow from leasing one car at time(year) 0, 1, and 2
2)Show the after-tax cash-flow from buying one car at time(year) 0, 1, and 2
3)What is the net present value of leasing one car
4)What is the net present value of buying one car
5)Does firm F choose to buy or lease the car?
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