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PRINCIPLES OF CORPORATE FINANCE

6th Edition RICHARD A. BREALEY AND STEWART C. MYERS Chapter 25 Leasing

Lease Net Present Value Greymare Bus Lines has always owned its own vehicles, and you -- as president Thomas Pierce III -- are now reconsidering that policy. Table 25-2 shows the direct cash-flow consequences of signing a contract to lease a bus costing $100,000.

Input Data: Cash-flow consequences of the lease contract offered to Greymare Bus Lines: Year In thousands: 0 1 2 3 4 5 6 Cost of new bus 100.00 Lost depreciation tax shield -7.00 -11.20 -6.72 -4.03 -4.03 -2.02 Lease payment -16.90 -16.90 -16.90 -16.90 -16.90 -16.90 -16.90 Tax shield of lease payment 5.92 5.92 5.92 5.92 5.92 5.92 5.92 Cash flow of lease 89.02 -17.99 -22.19 -17.71 -15.02 -15.02 -13.00 PV factor Output: NPV lease 1.065 7 0.00 -16.90 5.92 -10.98

-0.710

or

-$710