Your Firm Is Considering Leasing a New Computer

question 5

Multiple Choice

Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences) ?

• A) -$605
• B) -$955
• C) -$1,455
• D) -$1,305
• E) None of these.

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Definitions:

Percent of Sales Method

A financial forecasting model that predicts future variables, such as expenses and inventory levels, as a percentage of projected sales.

Credit Sales

Sales of goods or services that are paid for at a later date, extending credit to customers.

Bad Debt Expense

An expense reported by businesses to account for receivables that are no longer collectible, affecting the net income.

Allowance for Doubtful Accounts

A contra-asset account on the balance sheet, estimating the amount of receivables that are expected to be uncollectible.