Warf Computers needs specialized equipment for production. The company can buy the equipment from Clapton Acoustical Equipment

Question:

Warf Computers needs specialized equipment for production.
The company can buy the equipment from Clapton Acoustical Equipment for $5 million.The equipment falls in the three-year MACRS depreciation class.

At the end of four years, market value of the equipment is expected to be $600,000.
Alternatively, the company can lease from Hendrix Leasing. Lease contract calls for four annual payments of $1.3 million due at the beginning of the year.
Security deposit of $300,000 will be returned when the lease expires.Warf Computers can issue bonds with a yield of 11 percent and the company has a marginal tax rate of 35%.(1). If Warf leases, what is the after-tax lease payment in year 3?
(2). If Warf leases, what is the lost after-tax salvage value in year 4?
(3). If Warf leases, what is the lost depreciation tax shield in year 2?
(4). If Warf leases, what is the incremental cash flow in year 0?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...