Answer:
The present value of the relevant net cash outflows of the operating lease is $434,416.50.
Explanation:
Salvage value after tax = Salvage value * (100% - Tax rate) = $15,000 * (100% - 30%) = $10,500
Present value of salvage value after tax = Salvage value after tax * Present value of 1 at 6% in 5 years = $10,500 * 0.747 = $7,843.50
Present value of a Year annual operating lease = Annual operating * Present value of 1 at 6% in the years ………… (1)
Using equation (1), we have:
Present value of Year 1 annual operating lease = $105,000 * 0.943 = $99,015
Present value of Year 2 annual operating lease = $105,000 * 0.890 = $93,450
Present value of Year 3 annual operating lease = $105,000 * 0.840 = $88,200
Present value of Year 4 annual operating lease = $105,000 * 0.792 = $83,160
Present value of Year 5 annual operating lease = $105,000 * 0.747 = $78,435
Therefore, we have:
Present value of net cash outflows of the operating lease = Present value of Year 1 annual operating lease + Present value of Year 2 annual operating lease + Present value of Year 3 annual operating lease + Present value of Year 4 annual operating lease + Present value of Year 5 annual operating lease - Present value of salvage value after tax = $99,015 + $93,450 + $88,200 + $83,160 + $78,435 - $7,843.50 = $434,416.50
Therefore, the present value of the relevant net cash outflows of the operating lease is $434,416.50.
