Your company (BEB) is considering leasing solid oxide fuel cells that produce electricity on-site. You and your team need to perform analysis to support the decision-making process. The lease lasts for 12 years. The lease calls for 13 payments of $15,000 per year with the first payment occurring immediately. The fuel cells would cost $90,350 to buy and would be straight-line depreciated to zero salvage over 12 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 7.5%. The corporate tax rate is 36%.

Concept Check: Understanding which cash flows are relevant is key to determining the best financing methods or project acceptance. It helps to detail all your assumptions within the model since questions may arise years after the initial construction of the model.

Helpful Hint: Creating a timeline with corresponding cash flows is usually helpful. You should also do the NPV calculations showing your formula so if anyone wishes to change the variables they will know how to proceed.

What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?