Your Firm Is Considering Leasing a New Computer

question 37

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 is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?

• A)$-4,865
• B)$-700
• C)$6,950
• D)$7,650
• E)None of the above

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Definitions:

Risk-Free Rate

The theoretical rate of return of an investment with zero risk of financial loss, often represented by the yield on government bonds.

Option

A contract that gives its owner the right to buy or sell some asset at a fixed price on or before a given date.

European Option

Option that can be exercised only on the expiration date.

Expiration Date

The last day on which an option can be exercised.