Perfect Solution: FIN 516 Week 5 – Homework

Problem 25-6 on Purchase versus Lease based on Chapter 25

 

Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over 7 years. Craxton can lease the fabricator for $130,000 per year for 7 years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of the 7 years.)

  1. What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease?
  2. What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease?
  3. What are the incremental free cash flows of leasing versus buying?