Scana Corporation is considering leasing a new equipment. The lease lasts for 5 years. The lease...

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Scana Corporation is considering leasing a new equipment. Thelease lasts for 5 years. The lease calls for 5 payments of $34,000per year with the first payment occurring immediately. Theequipment would cost $126,000 to buy and would be straight-linedepreciated to a zero salvage value over 5 years. The actualsalvage value is negligible because of technological obsolescence.The firm can borrow at a rate of 6.5%. The corporate tax rate is25%. What is the after-tax cash flow from leasing relative to theafter-tax cash flow from purchasing in year 2?
$21,400
-$34,000
-$31,800
$25,600
-$42,500

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Solution The aftertax cash flow from leasing See Answer

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Scana Corporation is considering leasing a new equipment. Thelease lasts for 5 years. The lease calls for 5 payments of $34,000per year with the first payment occurring immediately. Theequipment would cost $126,000 to buy and would be straight-linedepreciated to a zero salvage value over 5 years. The actualsalvage value is negligible because of technological obsolescence.The firm can borrow at a rate of 6.5%. The corporate tax rate is25%. What is the after-tax cash flow from leasing relative to theafter-tax cash flow from purchasing in year 2?$21,400-$34,000-$31,800$25,600-$42,500