Market price $ 16,000.

00
useful life 3 years
Lease payments $ 6,000.00 Financial lease
borrowing rate
tax rate 35%
depreciation straight line

Implicit lease rate 13.07%

Year Initial balance Interest Principal Payment

0 16,000 6,000 6,000
1 10,000 1306.6 4,693 6,000
2 5,307 693.360356 5,307 6,000
3 0

Buying option
Year 0 1 2 3
Cost of equipment -16,000
Depreciation tax shield 1400 1400 1400
Salvage value 1000
Cash flow of buying -16,000 1,400 1,400 2,400

Capital lease
Year 0 1 2 3
Lease payments -26000 -26000 -26000 -26000
Depreciation tax shield 7000 7000 7000
Interest tax shield 457.31 242.6761246 0
Cash flow of leasing -26000 -18542.69 -18757.3239 -19000

Incremental cash flow

Year 0 1 2 3
Cost of equipment -100,000
Depreciation tax shield 0 5600 5600 5600
Salvage value
Lease payments -26000 -26000 -26000 -26000
Interest tax shield 693.8869 468.6787239 237.4369956
Lease-Buying 74000 -25306.1131 -25531.3213 -25762.563
Equivalent loan 79,866.95
NPV - 5,866.95

Cash flow of leasing -26000 -18306.1131 -18531.3213 -18762.563

Cash flow of buying -100000 7000 7000 7000
Year 0 1 2 3
Initial balance 79,866.95
Interest
Interest tax shield
Principal
Total payment
Final Balance 79,866.95
 For the condition 4 of the FASB (the net present value of the lease
payments represent the 90% of the market value of the asset): first I
have to deduct the maintenance and also the tax rate should be the
marginal cost of debt (the cost of debt that the corporation will
have) which is different from the marginal cost of debt after tax.

Final balance
10,000
5,307
0

7000

7000

7000
13000

-13000

7000
20000
4