Principles of Corporate Finance

Operating Lease

Example - cont

Acme Limo has a client who will sign a lease for 7 years, with lease payments due

at the start of each year. The following table shows the NPV of the purchases the new limo for $75,000 and leases it our for 7 years. limo if Acme

0 1 2 Year 3 4 5 6
Initial costMaintenance, insurance, selling, -75-12 -12 -12 -12 -12 -12 -12

Tax shield on costsand administrative costs 4.2 4.2 4.2 4.2 4.2 4.2 4.2
TotalDepreciation tax shield -82.8^0 -2.555.25 8.40.6 -2.765.04 -4.783.02 -4.783.02 -6.291.51
NPV @ 7% = - $98.15

TaxBreak even rent(level) 26.18-9.16 26.18-9.16 26.18-9.16 26.18-9.16 26.18-9.16 26.18-9.16 26.18-9.16
Break even rent after-taxNPV @ 7% = - $98.15 17.02 17.02 17.02 17.02 17.02 17.02 17.02