22-0 Incremental Cash Flows 22.4 After-tax lease payment (outflow) Lease payment*(1 – T) Lost depreciation tax shield (outflow) Depreciation * tax rate for each year Initial cost of machine (inflow) Inflow because we save the cost of purchasing the asset now May have incremental maintenance, taxes or insurance depending on the type of lease and whether the leased asset is replacing one currently owned LO3

22-1 Example: Lease Cash Flows ABC, Inc. needs new cars. The equipment cars would cost $10,000 each if purchased and would be depreciated at a CCA rate of 40%. They would help the sales force generate $6,000 in additional sales per year for 5 years. No salvage is expected after the 5 years. Alternatively, the company can lease the cars for $2,500 per year and payments are due at the beginning of the year. The marginal tax rate is 40%. What are the incremental cash flows? LO3

22-2 Example: Lease Cash Flows continued What are the incremental cash flows? After-tax lease payment = 2,500(1 -.4) = 1,500 (outflow years 1 - 5) Cost of the car = 100,000 (inflow year 0) Lost depreciation tax shield Table 22.2: Tax shield on CCA for car LO3