Your Firm Is Considering Leasing a New Radiographic Device

Your firm is considering leasing a new radiographic device. The lease lasts for 3 years. The lease calls for 4 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 3 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%. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences) ?

A) $4,067
B) $1,000
C) -$1,000
D) -$4,067
E) None of these.

Correct Answer:

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