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Assumptions: Tax Rate: Enter as a decimal Cost of Debt: Enter as a decimal Depreciation MACRS 3 year class % each year Incremental Cash Flows: Year 0 Year 1 Year 2 Year 3 Year 4 Purchase Price Lost salvage value (negative for cash out) Lost dep. tax shield (negative for cash out) 0 0 0 0 Security deposit (negative if cash out) Lease payment 0 0 0 Tax savings on lease payment 0 0 0 0 0 Cash flow from leasing 0 0 0 0 0 Net Advantage to Leasing After tax Cost of Debt 0.00% = Cost of Debt% * (1 - Tax Rate Percentage) - from assumptions above Present Value of Incremental Cash Flows - See NAL in textbook Using After Tax Cost of Debt as Cost of Capital $0 Using the NPV function in Excel. Click cell for formula or Same answer using the Sum of PV calculations $ - $ - $ - $ - $ - The Company should lease the asset YES The decision to buy or lease is made by looking at the incremental cash flows. The incremental cash flows from leasing the machine are the security deposit, the lease payments, the tax savings on the lease, the lost depreciation tax shield, the saved purchase price of the machine, and the lost salvage value. The salvage value of the equipment in four years will be: After-tax salvage value = $600,000 – $600,000(.35) After-tax salvage value = $390,000 This is an opportunity cost to Warf Computers since if the company leases the equipment it will not be able to sell the equipment in four years. The lease payments are due at the beginning of each year. Complete the following items after reading the case. Note: Only enter the highlighted items. Assumptions: Tax Rate: 0 Enter as a decimal Cost of Debt: 0 Enter as a decimal Depreciation MACRS 3 year class % each year 0 0 0 0 Incremental Cash Flows: Year 0 Year 1 Year 2 Purchase Price 0 Lost salvage value (negative for cash out) (1,689,025) Lost dep. tax shield (negative for cash out) 0 0 Security deposit (negative if cash out) Lease payment 0 Tax savings on lease payment 0 0 0 Cash flow from leasing 0 0 (1,689,025) Net Advantage to Leasing After tax Cost of Debt 0.00% = Cost of Debt% * (1 - Tax Rate Percentage) - from assumptions above Present Value of Incremental Cash Flows - See NAL in textbook Using After Tax Cost of Debt as Cost of Capital ($1,689,025) Using the NPV function in Excel. Click cell for formula or Same answer using the Sum of PV calculations $ (1,689,025) $ - $ (1,689,025) $ - $ - The Company should lease the asset NO QUESTION #2 This is an opportunity cost to Warf Computers since if the company leases the equipment it will not be able to sell the equipment in four years. The lease payments are due at the beginning of each year. Complete the following items after reading the case. Note: Only enter the highlighted items.

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Business Questions: Buy Or Lease
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