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# No.

## 2 Studi Kasus Leasing

Suppose Clorox can lease a new computer data processing system for \$975,000 per year for five years. Alternatively, it can purchase the
system for \$4.25 million. Assume Clorox has a borrowing cost of 7% and a tax rate of 35%, and the system will be obsolete at the end of five
years.

## Tax rate 35.00%

Borrowing Rate 7.00%
After tax
borrowing Rate 4.55%

a. If Clorox will depreciate the computer equipment on a straight-line basis over the next five years, and if the lease qualifies as a true
tax lease, is it better to lease or finance the purchase of the equipment?
Year 0 1 2 3 4 5
1 Capital Expenditure (4,250,000.00)
2 Depreciation Tax shield 297,500.00 297,500.00 297,500.00 297,500.00 297,500.00
3 Free Cash Flow (Buy) (4,250,000.00) 297,500.00 297,500.00 297,500.00 297,500.00 297,500.00
Lease
4 Lease Payments (975,000.00) (975,000.00) (975,000.00) (975,000.00) (975,000.00) 0.00
5 Income Tax Savings (341,250.00) (341,250.00) (341,250.00) (341,250.00) (341,250.00) 0.00
6 Free Cash Flow (Lease) (633,750.00) (633,750.00) (633,750.00) (633,750.00) (633,750.00) 0.00

FCF Lease - FCF Buy 3,616,250.00 (931,250.00) (931,250.00) (931,250.00) (931,250.00) (297,500.00)

## NPV of difference 41,112.48

Decision: The lease is better.

b. Suppose that if Clorox buys the equipment, it will use accelerated depreciation for tax purposes. Specifically, suppose it can expense
20% of the purchase price immediately and can take depreciation deductions equal to 32%, 19.2%, 11.52%, 11.52%, and 5.76% of
the purchase price over the next five years. Compare leasing with purchase in this case.
Depreciation rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Year 0 1 2 3 4 5
1 Capital Expenditure (4,250,000.00)
2 Depreciation Tax shield 297,500.00 476,000.00 285,600.00 171,360.00 171,360.00 85,680.00
3 Free Cash Flow (Buy) (3,952,500.00) 476,000.00 285,600.00 171,360.00 171,360.00 85,680.00
Lease
4 Lease Payments (975,000.00) (975,000.00) (975,000.00) (975,000.00) (975,000.00) 0.00
5 Income Tax Savings (341,250.00) (341,250.00) (341,250.00) (341,250.00) (341,250.00) 0.00
6 Free Cash Flow (Lease) (633,750.00) (633,750.00) (633,750.00) (633,750.00) (633,750.00) 0.00

FCF Lease - FCF Buy 3,318,750.00 (1,109,750.00) (919,350.00) (805,110.00) (805,110.00) (85,680.00)

## NPV of difference (30,711.86)

Decision: The purchase is better.
No. 3 Studi Kasus Leasing

Suppose Netflix is considering the purchase of computer servers and network infrastructure to facilitate its move into video-on-demand services. In total, it
will purchase \$48 million in new equipment. This equipment will qualify for accelerated depreciation: 20% can be expensed immediately, followed by 32%,
19.2%, 11.52%, 11.52%, and 5.76% over the next five years. However, because of the firms substantial loss carryforwards, Netflix estimates its marginal
tax rate to be 10% over the next five years, so it will get very little tax benefit from the depreciation expenses. Thus Netflix considers leasing the equipment
instead. Suppose Netflix and the lessor face the same 8% borrowing rate, but the lessor has a 35% tax rate. For the purpose of this question, assume the
equipment is worthless after 5 years, the lease term is 5 years, and the lease qualifies as a true tax lease.

## Lessor's Tax rate 35.00%

Borrowing Rate 8.00%
After tax
borrowing Rate 5.20%

a. What is the lease rate for which the lessor will break even?
Depreciation rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Year 0 1 2 3 4 5
1 Capital Expenditure (48,000,000.00)
2 Depreciation Tax shield 3,360,000.00 5,376,000.00 3,225,600.00 1,935,360.00 1,935,360.00 967,680.00
3 Free Cash Flow (Buy) (44,640,000.00) 5,376,000.00 3,225,600.00 1,935,360.00 1,935,360.00 967,680.00
Lease
4 Lease Payments 11,079,967.17 11,079,967.17 11,079,967.17 11,079,967.17 11,079,967.17 0.00
5 Income Tax 3,877,988.51 3,877,988.51 3,877,988.51 3,877,988.51 3,877,988.51 0.00
6 Free Cash Flow (Lease) 7,201,978.66 7,201,978.66 7,201,978.66 7,201,978.66 7,201,978.66 0.00
Lessor Free Cash Flow
7 Buy and Lease (37,438,021.34) 12,577,978.66 10,427,578.66 9,137,338.66 9,137,338.66 967,680.00

NPV of Lease must equal NPV of Buy (32,621,639.24) lease 0.00
Annual Payment must be 7,201,978.66
Before tax lease charge must be 11,079,967.17

## Lessee's Tax Rate 10.00%

Borrowing Rate 8.00%
After tax borrowing Rate 7.20%

## b. What is the gain to Netflix with this lease rate?

Depreciation rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Year 0 1 2 3 4 5
1 Capital Expenditure (48,000,000.00)
2 Depreciation Tax shield 960,000.00 1,536,000.00 921,600.00 552,960.00 552,960.00 276,480.00
3 Free Cash Flow (Buy) (47,040,000.00) 1,536,000.00 921,600.00 552,960.00 552,960.00 276,480.00
Lease
4 Lease Payments (11,079,967.17) (11,079,967.17) (11,079,967.17) (11,079,967.17) (11,079,967.17) 0.00
5 Income Tax Savings 1,107,996.72 1,107,996.72 1,107,996.72 1,107,996.72 1,107,996.72 0.00
6 Free Cash Flow (Lease) (9,971,970.45) (9,971,970.45) (9,971,970.45) (9,971,970.45) (9,971,970.45) 0.00

FCF Lease - FCF Buy 37,068,029.55 (11,507,970.45) (10,893,570.45) (10,524,930.45) (10,524,930.45) (276,480.00)

## NPV of difference 145,144.97

Decision: The lease is better.

## c. What is the source of the gain in this transaction?

The source of the gain is the difference in tax rates.