Use the following information for the next two problems:Barton Aviation is considering whether to lease or purchase an aircraft to transport its executives between company facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: Cash Flows After-TaxEnd of YearLease (cash flows are all negative)PurchaseYrs 1-4 cash flows are negative; Year 5 is positive.1.(40,000)(68,454)2.(40,000)(59,110)3.(40,000)(63,596)4.(40,000)(66,633)5.(40,000) 30,056 Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt. Given the above cash outflows:a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost of debt.b) Which alternative do you choose?

Concept used: In order to calculate present value there is a need to determine the net present value…

Answered: Use the following information for the…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 25P

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Use the following information for the next two problems:

Barton Aviation is considering whether to lease or purchase an aircraft to transport its executives between company facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below:

Cash Flows After-Tax

End of Year	Lease (cash flows are all negative)	Purchase Yrs 1-4 cash flows are negative; Year 5 is positive.
1.	(40,000)	(68,454)
2.	(40,000)	(59,110)
3.	(40,000)	(63,596)
4.	(40,000)	(66,633)
5.	(40,000)	30,056

Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt.

Given the above cash outflows:
a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost of debt.
b) Which alternative do you choose?

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