Europe Car Rental made the decision to upgrade its fleet. The new automobiles cost 1.9 million if purchased outright, and they are intended to have a useful economic life of 6 years beginning in year 0. The CFO is investigating a financial lease. The following details regarding the potential investment are provided:

Lease payment of 0.4 million each year for six years. The lessee's pre-tax debt cost is 4.3%. The marginal tax rate for the lessee is 19%. Lease payments are completely tax deductible. Year 0 lease payments begin. Beginning in year one, the automobiles are depreciated using the straight-line approach. Assume that the new automobiles have no salvage value.

The following elements are required: a) Make a table explaining the lease's immediate cash flow implications. b) Determine the net present value of the financing lease. As your discount rate, use the debt's after-tax cost. c) suggest to the lessee's Board of Directors whether the automobiles should be leased or purchased outright.

Answer rating: 100% (QA)

Lease Cash Flow Analysis and Recommendation a Lease Cash Flow Implications Year Cash Outflow Lease Payment Tax Shield Lease Payment Tax Rate Net Cash ... View the full answer