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 NPV of the lease?
A)£-111,690
B)£-295,040
C)£-305,388
D)£-309,690
E)None of the above.

Question

Quizplus · Accepted Answer

The NPV of the lease is calculated by comparing the cost of leasing with the cost of buying. The cost of buying includes the purchase price minus the tax shield from depreciation. The cost of leasing includes the present value of lease payments. The NPV is the difference between these two costs, discounted at the borrowing rate.

Your ﬁRm Is Considering Leasing a New Robotic Milling Control