Question
Rochelle was trying to decide whether to buy or lease a binding machine for her publishing firm, Chelle-Book. She had done most of the analytical
Rochelle was trying to decide whether to buy or lease a binding machine for her publishing firm, Chelle-Book. She had done most of the analytical work, but a client interrupted her with an urgent call. Now it was time to finish her analysis. She had determined that purchasing the binding machine, which cost $40,500, would have an economic cost to her of $28,479 including salvage value. That is, the NPV was -$28,479.
On her desk, Rochelle also had a lease proposal from Swift Leasing. Their sales pitch was that they would provide the binding machine to Rochelle under their "No Worries" lease program for "only $9,891 per year, all maintenance included." Their schedule of five annual payments looked like the following:
Binding Machine | 0 | 1 | 2 | 3 | 4 | 5 | |
Lease Payment | (9,891) | (9,891) | (9,891) | (9,891) | (9,891) |
Rochelle knew that she would have to find the NPV of the lease. She would have to calculate the tax shield of the lease payment, find the net cash flow of the lease, and discount each of those cash flows by the discount factor for each year. Her cash tax rate was 25% and her discount rate was 7.95%
What was the NPV of the lease?
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