Your ﬁrm is considering leasing a new robotic milling control system.The lease lasts for 5 years.The lease calls for 6 payments of £300,000 per year with the ﬁrst payment occurring at lease inception.
The black box would cost £1,050,000 to buy and would be straight-line depreciated to a zero salvage.
The actual salvage value is zero.The ﬁrm can borrow at 8%, and the corporate tax rate is 34%.
What is the after-tax cash ﬂow from leasing in year 0?
A)£300,000
B)£495,000
C)£852,000
D)£948,000
E)None of the above.

Question

Quizplus · Accepted Answer

To calculate the after-tax cash flow from leasing in year 0, we need to consider the lease payment and the tax savings from the lease payment and depreciation.

Lease payment:
The lease payment is £300,000 in year 0.

Tax savings from lease payment:
The lease payment is tax-deductible, so the firm can save on its taxes. The tax savings are calculated as (lease payment) x (tax rate), which is £300,000 x 34% = £102,000.

Tax savings from depreciation:
The black box would be depreciated straight-line over 5 years, so the annual depreciation expense is (£1,050,000 / 5) = £210,000. The tax savings from depreciation are calculated as (depreciation expense) x (tax rate), which is £210,000 x 34% = £71,400.

Total tax savings:
The total tax savings are the sum of the tax savings from the lease payment and the tax savings from depreciation, which is £102,000 + £71,400 = £173,400.

After-tax cash flow from leasing:
To calculate the after-tax cash flow from leasing, we subtract the tax savings from the lease payment from the lease payment itself and add the tax savings from depreciation. Therefore, the after-tax cash flow from leasing in year 0 is:
(lease payment) - (tax savings from lease payment) + (tax savings from depreciation)
= £300,000 - £102,000 + £71,400
= £269,400

Therefore, the best choice is C.

Your ﬁRm Is Considering Leasing a New Robotic Milling Control