Ajax Company Is Considering a Three Year Financial Lease$$\begin{array} { | l | c | c | c | c | }
\hline \text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Lease Cash Flows } & + 62,000 & - 26,800 & - 22,200 & - 17,600 \
\hline
\end{array}$$

Question

Ajax Company Is Considering a Three Year Financial Lease$$\begin{array} { | l | c | c | c | c | } 
\hline \text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Lease Cash Flows } & + 62,000 & - 26,800 & - 22,200 & - 17,600 \
\hline
\end{array}$$

Examlex · Accepted Answer

The Answer is The value of the equivalent loan is the present value of the after-tax lease cash outflows, discounted at the after-tax cost of borrowing, (1 -.3) ×.10 = .07, 7%:

ext { Equivalent loan } = \frac { 26,800 } { 1.07 } + \frac { 22.200 } { 1.07 ^ { 2 } } + \frac { 17.600 } { 1.07 ^ { 3 } } = \$ 58,803.91

Value of the lease = NPV of lease = Initial lease cash inflow - equivalent loan
= 62,000 - 58,803.91 = $3,196.09.The lease will add positively to the value of the purchase.

Ajax Company Is Considering a Three Year Financial Lease What Is the Value of the Lease

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Ajax Company Is Considering a Three Year Financial Lease What Is the Value of the Lease

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