A company is planning to move to a larger office and is trying to decide if the
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Question:
A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased. Annual cash flows for owning versus leasing are estimated as follows. Assume that the cash flows from operations will remain constant over a year holding period. If purchased, the company will invest $ in equity and finance the remainder with an interestonly loan that has a balloon payment due in year The companys marginal income tax rate is and the aftertax cash flow from sale of the property at the end of year is expected to be $ What is the incremental rate of return on equity to the company, if the property is owned instead of leased?
Sales
Cost of goods sold Gross income Operating expenses:
Business
Real Estate Lease payments Interest Depreciation Taxable income Tax
Income after tax Plus: Depreciation Aftertax cash flow
Own
Lease
Posted Date: