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CHAPTER. 21A. APV Approach to Leasing. Appendix 21A: APV Approach to Leasing. APV = All-Equity Value + Financing NPV. Calculations shown on the following slides will show that for the latest Clumzee Movers example (where the tax rate is 25%) APV = $591.38 – $1,135.30 APV = –$543.91

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  1. CHAPTER 21A APV Approachto Leasing

  2. Appendix 21A: APV Approachto Leasing APV = All-Equity Value + Financing NPV Calculations shown on the following slides will show that for the latest Clumzee Movers example (where the tax rate is 25%) APV = $591.38 – $1,135.30 APV = –$543.91 Which is the same value as the easier NPV analysis.

  3. 5 $ 5 , 900 å = - = All - equity val ue $ 25 , 000 $ 591 . 38 t ( 1 . 06667 ) = t 1 Appendix 21A: APV Approachto Leasing APV = All-Equity Value + Financing NPV • To find the all-equity value, discount the cash flows at the pre-tax interest rate. The after tax rate was 5% which implies a pretax rate of 6.66% = 5%/(1-.25). Cash Flows ClumZee Movers: Leasing Instead of Buying Year 0 Years 1-5 Cost of truck we didn’t buy $25,000 Lost Depreciation Tax Shield 5,000×(.25) = –$1,250 After-Tax Lease Payments 6,200×(1 –.25) = –$4,650 $25,000 –$5,900

  4. 5 $ 5 , 900 å = = Increased debt capacity $ 25 , 543 . 91 t ( 1 . 05 ) = 1 t Appendix 21A: APV Approachto Leasing APV = All-Equity Value + Financing NPV • The NPV of the financing is the forgone interest tax shields on the debt that ClumZee movers didn’t go into when they leased instead of bought the truck. • ClumZee agreed to a lease payment of $5,900. • This payment would support a loan of $25,543.91

  5. $ 425 . 73 $ 348 . 69 $ 267 . 79 $ 182 . 84 $ 93 . 65 - = + + + + $ 1 , 135 . 30 2 3 4 5 ( 1 . 06667 ) ( 1 . 06667 ) ( 1 . 06667 ) ( 1 . 06667 ) ( 1 . 06667 ) = - = - APV $ 591 . 38 $ 1 , 135 . 30 $ 543 . 91 Appendix 21A: APV Approachto Leasing The lost interest tax shield associated with this additional debt capacity of $25,543.91 has a present value of $1,135.30

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