Calculate the incremental npv of the lease agreement

Reference no: EM13290234

Ciduro 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 is 8% per annum. Calculate the incremental NPV of the lease agreement and ascertain if the company should take out the lease. Show all workings.

Reference no: EM13290234

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