Determine net present value of leasing

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A company wants to get a bullet proof luxurious limousine for its CEO. The limousine would cost $1 million to buy. The limousine will be depreciated at a rate of $100,000 per year for tax purposes. Suppose the limousine could be sold off in five years for $500,000. Suppose also that the firm could alternatively sign a five-year operating lease for the limousine with lease payments of $150,000 per year. Each payment would be due at the beginning of the year. The company's effective tax rate is 25 percent.

The before -tax rate of borrowing is 8 percent.

Cash Flows in $
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After tax lease payment
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(b). Determine Net Present Value of Leasing assuming payments are made annually and make a lease or buy decision.

Reference no: EM132558360

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