Top management of Markel Company is considering whether to lease or purchase an aircraft to transport them around the country. They are in the 40 percent tax bracket and their after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below. (The Year 5 purchase cash flow is positive since they rent out the aircraft for part of that year.) End of Year Lease (cash flows are all negative) Purchase Yrs 1-4 cash flows are negative; Year 5 is positive. 1. (40,000) (68,454) 2. (40,000) (59,110) 3. (40,000) (63,596) 4. (40,000) (66,633) 5. (40,000) 30,056 Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt. Given the above cash outflows: a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost of debt. (Hint: if you are confused about using NPV for this problem, you can calculate the PV of each cash flow and add them together. Keep in mind that there are outflows and inflows.) b) Which alternative do you choose?
Use the following information for the next two problems:
Top management of Markel Company is considering whether to lease or purchase an aircraft to transport them around the country. They are in the 40 percent tax bracket and their after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below. (The Year 5 purchase cash flow is positive since they rent out the aircraft for part of that year.)
|
End of Year |
Lease |
Purchase |
|
1. |
(40,000) |
(68,454) |
|
2. |
(40,000) |
(59,110) |
|
3. |
(40,000) |
(63,596) |
|
4. |
(40,000) |
(66,633) |
|
5. |
(40,000) |
30,056 |
- Given the above
cash outflows , calculate thepresent value of the after-tax cash flows of the lease alternative using the after-tax cost of debt.
Given the above cash outflows:
a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost of debt. (Hint: if you are confused about using
b) Which alternative do you choose?
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