FIND THE LEASE RENTAL AND TAX AMOUNT for the four year Year 0 Year 1 Year
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Question:
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
Cost of owning | |||||
Net Purchase price | $ 15,00,000 | ||||
Maintenance Expenses | $ 75,000 | $ 75,000 | $ 75,000 | $ 75,000 | |
Tax Savings on Maintenance Expenses | $ -30,000 | $ -30,000 | $ -30,000 | $ -30,000 | |
Depreciation Tax savings | $ -1,98,000 | $ -2,70,000 | $ -90,000 | $ -42,000 | |
Salvage Value | $ -2,50,000 | ||||
Tax on Salvage Value | $ 1,00,000 | ||||
Net Cash Flow | $ 15,45,000 | $ -1,53,000 | $ -2,25,000 | $ -45,000 | $ -1,92,000 |
Cost of leasing | |||||
Lease Payment | $ 4,00,000 | $ 4,00,000 | $ 4,00,000 | $ 4,00,000 | |
Tax Savings on Lease Payments | $ -1,60,000 | $ -1,60,000 | $ -1,60,000 | $ -1,60,000 | |
Maintenance Expenses | $ 75,000 | $ 75,000 | $ 75,000 | $ 75,000 | |
Tax Savings on Maintenance Expenses | $ -30,000 | $ -30,000 | $ -30,000 | $ -30,000 | |
Net Cash Flow | $ 45,000 | $ 2,85,000 | $ 2,85,000 | $ 2,85,000 | $ 2,40,000 |
Net Advantage of leasing | |||||
PVF @15% or 9% after tax | 1.0000 | 0.9174 | 0.8417 | 0.7722 | 0.7084 |
Present Value of Cost of Owning | $ 10,44,489 | ||||
Present Value of Cost of leasing | $ 9,36,441 | ||||
Net Advantae of Leasing | $ 1,08,048 | ||||
Net advantage of Leasing= $108,048
The IRR of the above cash flow is
Year | Particulars | Amount |
0 | Cost of Asset | |
1 | Lease Rental+Taxsavings on Depreciation | |
2 | Lease Rental+Taxsavings on Depreciation | |
3 | Lease Rental+Taxsavings on Depreciation | |
4 | Lease Rental+Taxsavings on Depreciation+Salvage avlue after tax | |
IRR at 9%guess (after tax) | 24.57% |
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date: