Calculate the NPV of an investment, considering a capital lease with following c

Question

Calculate the NPV of an investment, considering a capital lease with following conditions:

Annual lease payments of $260,000 from year 1 to year 5

Effective annual interest rate of 8% for the borrowed money

Asset would yield the annual revenue of $350,000 for five years (from year 1 to year 5)

Asset would have operating cost of $60,000 for year 1 to 5

The asset can be depreciated based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS) over six years (from year 0 to year 5)

Salvage value of $500,000 at the end of the 5th year

Income tax 40%

Minimum ROR of 10%

Please calculate and include the lease principle and interest calculations.

Explanation / Answer

Interest and principal calculation as follows;

Net cash flow calcultion from Y1 to Y5 based on the data provided. Depreciation in the below table cacultaed as per MACRs 5 year life depreciation with half year convention which is 20%,32%,19.2%,11.52%,11.52% & 5.76% from Y1 to Y5 respectively.Salvage value is not taken into consideration in MACRS.

NPV for the net cash flow = $ 97,455.96 ( answer)

Interest calculation @ 8% Principal Interest Y1    1,300,000.00    104,000.00 Y2    1,040,000.00      83,200.00 Y3        780,000.00      62,400.00 Y4        520,000.00      41,600.00 Y5        260,000.00      20,800.00

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