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TLP has 31 Dec year end and pay corporation tax at 20%. The machine is entitled to 25% tax allowable deprecation .TLP after tax cost of borrowing is 10% and before cost of capital is 8%
It could also obtain machine through 4 year finance lease of $120,000 payable at the end of each year
Under option 2 what is negative NPV if company consider operating lease as opposed to buying?No idea. please help
You have not written whether tax is payable immediately or with a one year delay.
The lease flows are outflows 120,000 per year from 1 to 4.
The tax flows are inflows of 20% x 120,000 = 24,000 a year.
If there is no delay in tax then the tax flows are from 1 to 4
If there is a 1 year delay in tax, then the tax flows are from 2 to 5.You discount both sets of flows at the cost of borrowing of 10%.
I do suggest that you watch my free lectures on lease and buy. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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