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Calculate the incremental npv of the lease agreement

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Reference no: EM13184743

Allied Constructions Limited is considering entering into a lease agreement that contains the following information for a new machine:

  • Lease payment (in advance) = $120,000 per year

  • Lease term = 5 years

  • Purchase cost = $500,000

  • Depreciation per year = 20% of purchase cost

  • Residual value = $50,000

  • Salvage value = $20,000

    The relevant tax rate is 35%. Tax savings on the lease will be recorded in the same year as the lease payments.The company's before tax cost of debt is8% per annum. Calculate the incremental NPV of the lease agreement and ascertain if the company should take out the lease.

Reference no: EM13184743

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