Hittel, Inc. is considering leasing or purchasing a small aircraft to transport

Question

Hittel, Inc. is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40% tax bracket and its after?tax cost of debt is 7%.

The estimated after?tax cash flows for the lease and purchase alternatives are given below:

End of Cash Flows (after?tax)

Year Lease Purchase <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

1 ? 64,329 ? 68,454

2 ? 64,329 ? 59,110

3 ? 64,329 ? 63,596

4 ? 64,329 ? 66,633

5 -64,329 - 30,056

Given the above cash outflows for each alternative, calculate the present value of

the after?tax cash flows using the after?tax cost of debt for each alternative.

Explanation / Answer

present value of cah flow for alt 1 = 64239*PVIFA(7%,5) =64239*4.1002 = 263392.7

present value of cah flow for alt 2 = 68454/(1.07) + 59110/(1.07)^2 + 63596/1.07^3+66633/1.07^4+30056/1.07^5 = 239781.5

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