Answer to the question number: 5

Present value of lease financing:

0 1 2 3 4 5 6 7
Lease
payment $16,000.00 $16,000.00 $16,000.00 $16,000.00 $16,000.00 $16,000.00 $16,000.00 $16,000.00
Tax-shield
benefits -$5,600.00 -$5,600.00 -$5,600.00 -$5,600.00 -$5,600.00 -$5,600.00 -$5,600.00
Cash outflow
after taxes $16,000.00 $10,400.00 $10,400.00 $10,400.00 $10,400.00 $10,400.00 $10,400.00 $10,400.00
Present value
of cash outflow $16,000.00 $9,647.50 $8,949.44 $8,301.89 $7,701.20 $7,143.97 $6,627.06 $6,147.55
Total present value of cash outflow of lease financing $67,448.00

After tax cost of debt 0.078

Annual debt payment:

A $17,973.47
i 0.12
n 8
m 1
PV $100,000.00

Loan amortization schedule:

Beginning Loan Interest Principal Ending
Year
Balance Payment Payment Payment Balance
0 $100,000.00 $17,973.47 $0.00 $17,973.47 $82,026.53
1 $82,026.53 $17,973.47 $9,843.18 $8,130.28 $73,896.25
2 $73,896.25 $17,973.47 $8,867.55 $9,105.92 $64,790.33
3 $64,790.33 $17,973.47 $7,774.84 $10,198.63 $54,591.70
4 $54,591.70 $17,973.47 $6,551.00 $11,422.46 $43,169.24
5 $43,169.24 $17,973.47 $5,180.31 $12,793.16 $30,376.08
 6 $30,376.08 $17,973.47 $3,645.13 $14,328.34 $16,047.74
7 $16,047.74 $17,973.47 $1,925.73 $16,047.74 $0.00

Depreciation schedule:
Annual
Year MACRS(%)
Depreciation
1 0.2 $20,000.00
2 0.32 $32,000.00
3 0.192 $19,200.00
4 0.1152 $11,520.00
5 0.1152 $11,520.00
6 0.0576 $5,760.00

Present value of cash outflows for debt financing:

0 1 2 3 4 5 6 7
Installment
payment $17,973.47 $17,973.47 $17,973.47 $17,973.47 $17,973.47 $17,973.47 $17,973.47 $17,973.47
Salvage
value
Interest
payment $0.00 $9,843.18 $8,867.55 $7,774.84 $6,551.00 $5,180.31 $3,645.13 $1,925.73
Depreciation
expense $20,000.00 $32,000.00 $19,200.00 $11,520.00 $11,520.00 $5,760.00
Tax-shield
benefit $0.00 $10,445.11 $14,303.64 $9,441.19 $6,324.85 $5,845.11 $3,291.80 $674.01
After tax
salvage value
Cash outflows
after taxes $17,973.47 $7,528.35 $3,669.83 $8,532.27 $11,648.62 $12,128.36 $14,681.67 $17,299.46
Present value of
cash outflows
after taxes $17,973.47 $6,983.63 $3,157.97 $6,810.96 $8,625.80 $8,331.21 $9,355.41 $10,225.89
Total present value of cash outflows after taxes $64,336.00
Because the present value of debt payments, $64336.00, is less than the present value of lease payments, $67448.00,
the debt alternative is preferred.
 8

-$5,600.00

-$5,600.00

-$3,070.70
 8

-$20,000.00

-$7,000.00

-$13,000.00

-$7,128.42
 Answer to the question number: 6

Present value of lease financing:

0 1 2 3 4 5
Lease
payment $17,000.00 $17,000.00 $17,000.00 $17,000.00 $17,000.00
Tax-shield
benefits -$5,100.00 -$5,100.00 -$5,100.00 -$5,100.00 -$5,100.00
Cash outflow
after taxes $17,000.00 $11,900.00 $11,900.00 $11,900.00 $11,900.00 -$5,100.00
Present value of
cash outflow $17,000.00 $11,121.50 $10,393.92 $9,713.94 $9,078.45 -$3,636.23
Total present value of cash outflow of lease financing $53,672.00

After tax cost of debt 0.07

Annual debt payment:

A $19,185.27
i 0.1
n 5
m 1
PV $80,000.00

Loan amortization schedule:

Beginning Loan Interest Principal Ending
Year
Balance Payment Payment Payment Balance
0 $80,000.00 $19,185.27 $0.00 $19,185.27 $60,814.73
1 $60,814.73 $19,185.27 $6,081.47 $13,103.80 $47,710.93
2 $47,710.93 $19,185.27 $4,771.09 $14,414.18 $33,296.75
3 $33,296.75 $19,185.27 $3,329.68 $15,855.60 $17,441.16
4 $17,441.16 $19,185.27 $1,744.12 $17,441.16 $0.00
Depreciation schedule:
Annual
Year MACRS(%)
Depreciation
1 0.3333 $26,664.00
2 0.4445 $35,560.00
3 0.1481 $11,848.00
4 0.0741 $5,928.00

Present value of cash outflows for debt financing:

0 1 2 3 4 5
Installment
payment $19,185.27 $19,185.27 $19,185.27 $19,185.27 $19,185.27
Salvage
value -$16,000.00
Interest
payment $0.00 $6,081.47 $4,771.09 $3,329.68 $1,744.12
Depreciation
expense $26,664.00 $35,560.00 $11,848.00 $5,928.00
Tax-shield
benefit $0.00 $9,823.64 $12,099.33 $4,553.30 $2,301.63
After tax
salvage value -$4,800.00
Cash outflows
after taxes $19,185.27 $9,361.63 $7,085.94 $14,631.97 $16,883.64 -$11,200.00
Present value of
cash outflows
after taxes $19,185.27 $8,749.19 $6,189.14 $11,944.05 $12,880.45 -$7,985.45
Total present value of cash outflows after taxes $50,963.00

Because the present value of debt payments, $50963.00, is less than the present value of lease payments, $53672,
the debt alternative is preferred.