Your firm is considering leasing a new radiographic device. The lease lasts for three years. The lease calls for four payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over three years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 12%. The corporate tax rate is 40%.
a. What is the NPV of the lease relative to the purchase?
b. What would the after-tax cash flow in year three be if the asset had a residual value of $1,000 (ignoring any possible risk differences)?